Discusses the connection between conventional models of business investment and the literature on the imperfections in capital markets and the differences in individual firms' abilities to access these markets. Financing methods considered in this analysis include short-term bank debt, long-term...

Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the "cost of capital" or "q"). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a...