Multiple market imperfections, firm profitability and investment

This paper investigates the impact of the interaction between product, labor and financial market imperfections on firms’ investment by using a panel data of European firms over the period 1994–2008. It studies the impact of product and labor market regulations on firm investment and how it changes with the degree of financial market imperfections. Findings show that product and labor market regulations negatively affect firm investment by lowering firm profitability. The presence of more efficient financial markets increases firm investment and lowers the negative effects of market regulations.