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Investment, Uncertainty, and Liquidity

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Author Info
Glenn W. Boyle (University of Otago)
Graeme A. Guthrie (Victoria University of Wellington)

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Abstract

We analyze the dynamic investment decision of a firm subject to an endogenous financing constraint. The threat of future funding shortfalls lowers the value of the firm's timing options and encourages acceleration of investment beyond the first-best optimal level. As well as highlighting another way by which capital market frictions can distort investment behavior, this result implies that (1) the sensitivity of investment to cash flow can be greatest for high-liquidity firms and (2) greater uncertainty has an ambiguous effect on investment. Copyright (c) 2003 by the American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 5 (October)
Pages: 2143-2166
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:5:p:2143-2166

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  1. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2008. "Corporate Financial and Investment Policies When Future Financing Is Not Frictionless," Working Paper Series 2008-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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  2. Rozália Pál & Roman Kozhan, 2006. "Firms' investment under financing constraints. An euro area investigation," IEHAS Discussion Papers 0606, Institute of Economics, Hungarian Academy of Sciences, revised 21 Jul 2006. [Downloadable!]
  3. Décamps, Jean-Paul & Villeneuve, Stéphane, 2005. "Optimal Dividend Policy and Growth Option," IDEI Working Papers 369, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  4. Anderson, Ronald W & Carverhill, Andrew, 2005. "A Model of Corporate Liquidity," CEPR Discussion Papers 4994, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Sean Cleary & Paul Povel & Michael Raith, 2003. "The U-shaped Investment Curve: Theory and Evidence," Finance 0311010, EconWPA. [Downloadable!]
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  6. Alfredo Bobillo & Juan Rodriguez Sanz & Fernando Tejerina Gaite, 2009. "Investment Decisions, Liquidity, and Institutional Activism: An International Study," Journal of Business Ethics, Springer, vol. 87(1), pages 25-40, April. [Downloadable!] (restricted)
  7. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2006. "Executive financial incentives and payout policy: firm responses to the 2003 dividend tax cut," Finance and Economics Discussion Series 2006-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  8. Pawlina, G. & Renneboog, L.D.R., 2005. "Is investment-cash flow sensitivity caused by the agency costs or asymmetric information? : Evidence from the UK," Discussion Paper 01, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  9. Sun, Jianjun & Yamori, Nobuyoshi, 2009. "Regional disparities and investment-cash flow sensitivity: Evidence from Chinese listed firms," MPRA Paper 14858, University Library of Munich, Germany. [Downloadable!]
  10. Hirth, Stefan & Uhrig-Homburg, Marliese, 2009. "Investment Timing, Liquidity, and Agency Costs of Debt," Finance Research Group Working Papers F-2009-04, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
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