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Investment Timing when External Financing is Costly

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  • Stefan Hirth
  • Marliese Uhrig‐Homburg

Abstract

This paper analyzes the investment timing of firms facing two dimensions of financing constraints: Liquidity constraints and capital market frictions inducing financing costs. We show that liquidity constraints are not sufficient to explain voluntary investment delay. However, when additionally considering financing costs, we can explain both voluntary delay and acceleration of investment. More precisely, we find that investment thresholds are U‐shaped in liquid funds. For high‐liquidity firms, investment thresholds are decreasing (i.e., accelerated investment takes place) in either dimension of financing constraint. In contrast, investment thresholds are increasing (i.e., investment is further delayed) in either form of financing constraint for low‐liquidity firms. For intermediate levels of liquidity, investment thresholds are U‐shaped in market frictions.

Suggested Citation

  • Stefan Hirth & Marliese Uhrig‐Homburg, 2010. "Investment Timing when External Financing is Costly," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7‐8), pages 929-949, July.
    • Handle: RePEc:bla:jbfnac:v:37:y:2010:i:7-8:p:929-949
    DOI: 10.1111/j.1468-5957.2010.02206.x
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    References listed on IDEAS

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    3. Koussis, Nicos & Martzoukos, Spiros H., 2022. "Credit line pricing under heterogeneous risk beliefs," International Journal of Production Economics, Elsevier, vol. 243(C).

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