Types of financing and investment-cash flow relationship

Abstract

Through the credit channel, a change in monetary policy translates into a change in the amount of funds available to a firm, and thus affects firm investment Underlying the functioning of this channel is the assumption of imperfect· capital markets due to asymmetric information between borrowers and fenders. Under this assumption, there exists a wedge in costs between internal and external funds. That is, each firm faces a different interest rate depending on its risk premium. Economists have centred their discussions on the theoretical insights into comparative advantage of bank-based or market-based financial systems in promoting long-run economic growth. Up to our knowledge, there has been no investigation of whether these differences between financial systems may be related to differences in the impact of financial factors/constraints on investment. While, the current researches in Islamic-based financial system concentrate on the permissible scope of activities for Islamic banks and other Islamic depository financial intermediaries. These activities ore mainly determined by the regulations dictating the abolishment of interest rate in the financial system. This paper aims at constructing an investment model in which its main element is to compare results for the some investment models across different financial systems (and also different types of financing), rather than to compare "competiting" models within the some country. We, therefore, emphasise models that appear to be an alternative to the choice of financial systems.