Journal article
Financial Innovations and the Real Economy
Journal of International Economics and Finance, Vol.2(1), pp.51-62
2022
Abstract
We show that financial innovations when investors greatly value certainty, by letting firms benefit from safe cash flows in new ways, potentially cause a misallocation of resources at the firm level with low net present value (NPV) projects (with larger amounts of safe cash flows) getting preference over high NPV projects. Even negative NPV projects may be accepted. Such financial innovations benefit large firms (with large cash flows) more than small firms; hence, they widen the value-gap between leader and follower firms. These results indicate that productivity slowdown and the rise of superstar firms are not independent phenomena, rather they share the same underlying cause: Financial innovations letting firms benefit from safe cash flows. We show that misallocation towards low NPV projects gets worse as interest rates approach zero. The value-gap between large and small firms also increases as interest rates approach zero. These results cast doubt on the effectiveness of monetary policy in a low interest rate environment.
Details
- Title
- Financial Innovations and the Real Economy
- Authors
- Hammad Siddiqi (Author) - University of the Sunshine Coast, Queensland, School of Business and Creative Industries
- Publication details
- Journal of International Economics and Finance, Vol.2(1), pp.51-62
- Publisher
- ESI Publications
- ISSN
- 2583-1178
- Organisation Unit
- School of Business and Creative Industries
- Language
- English
- Record Identifier
- 99698698202621
- Output Type
- Journal article
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