ABSTRACT

The purpose of this study is to examine the interdependence of investment and financing decisions and to explain the investment and financing behaviour of Finnish industrial firms.

In the empirical part, models of gross investment in fixed assets, external financing (here net external financing obtained by borrowing) and internal financing (depreciation plus retained earnings) are estimated in each of the 11 largest Finnish multibranch and 9 largest paper and paper product firms using time series data on the years 1951-68.

Investment behaviour is explained by a distributed-lag model which includes the lagged values of the exogenous variables: accelerator - capacity variable, credit rationing variable and internal financing variable. Variables explaining external financing are gross investment in fixed assets and investment in working capital. The internal financing of the firm is explained by sales, depreciable fixed assets and a variable indicating general earning possibilities of Finnish firms. The empirical results show that there is a strong interdependence between investment and financing decisions. This conclusion is supported by the estimation results of the simultaneous model which includes the endogenous variables: gross investment in fixed assets, external financing and internal financing.