Date of Original Version
International Economic Review Volume 50 Issue 2 (May 2009), Pages 577 - 606
The definitive version is available at www3.interscience.wiley.com
Abstract or Description
When markets are incomplete, shareholders typically disagree on the firm's optimal investment plan. This article studies the shareholders' preferences with respect to the firm's investment in a model with aggregate risk, incomplete markets and heterogeneous households who trade in firms' shares instead of directly accumulating physical capital. If the production function exhibits constant returns to scale and borrowing limits are not binding, a firm's shareholders unanimously agree on its optimal level of investment. In contrast, with binding borrowing constraints, constrained shareholders prefer a higher level of investment than unconstrained ones.