The effect of external finance on the equilibrium allocation of capital

Heitor Almeida, Daniel Wolfenzon

Research output: Contribution to journalArticlepeer-review


We develop an equilibrium model to understand how the efficiency of capital allocation depends on outside investor protection and the external financing needs of firms. We show that when capital allocation is constrained by poor investor protection, an increase in firms' external financing needs may improve allocative efficiency by fostering the reallocation of capital from low to high productivity projects. We also find novel empirical support for this prediction.

Original languageEnglish (US)
Pages (from-to)133-164
Number of pages32
JournalJournal of Financial Economics
Issue number1
StatePublished - Jan 2005
Externally publishedYes


  • Capital reallocation
  • External finance
  • Financial development
  • Invetor protection

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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