Investment and liquidity constraints

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Over the past decade, the connection between financial factors and investment has emerged as a significant area of theoretical and empirical research. Firms in weak financial positions struggle to raise capital under favorable conditions, limiting their ability to finance profitable investment projects. Empirical evidence suggests that young, fast-growing, low-dividend firms experience greater liquidity constraints, leading to more pronounced investment reactions to changes in their internal financial flows. Additionally, if credit conditions are affected by expansionary or restrictive monetary policies, the cycle of real activity may be accelerated, with effects surpassing those of the interest channel alone. This analysis investigates the influence of financial factors on investment decisions through the Q-theory of investment, utilizing a comprehensive database of 2,314 German firms, including 1,342 manufacturing entities. The Deutsche Bundesbank's Corporate Balance Sheet Statistics provide a unique opportunity to examine firm-level heterogeneity, which macro- or mesoeconomic data cannot capture. Access to this database was facilitated during a research visit to the Deutsche Bundesbank in 2002, and I extend my gratitude to Heinz Herrmann for his support and insightful discussions throughout the research project.