Imperfect capital markets, financing constraints, and improvement activities

Abstract

In this article, I examine the allocation of produc- credit markets with private information. Particularly, I analyse adverse selection problem in credit markets in which lenders or investors cannot observe the quality of firms' investment opportunities while the firms can. I show that the firms or borrowers face cing constraints in this imperfect environment. ability of the firms to borrow and invest as well as the type of loan contracts may depend upon the size of the firms internal funds. Moreover, insufficient amount of funds can lead to total markets can fail.