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Investment and dividends under irreversibility and financial constraints

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  • Holt, Richard W. P.

Abstract

Research finds that firms' investment and dividend policies are distorted by irreversibility and finance constraints. Whereas the existing literature examines these features separately, this paper considers their interaction. The main theoretical result concerns the separation of the investment and payout thresholds. The ordering of investment and distribution activities is endogenously determined and depends on the levels of capacity and cash balances in a manner consistent with a life- cycle interpretation of firm behaviour. The concavity of the revenue function is capital stock and the complementarily of the constraints drive these results. Important ramifications for empirical work on investment are discussed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 27 (2003)
Issue (Month): 3 (January)
Pages: 467-502

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Handle: RePEc:eee:dyncon:v:27:y:2003:i:3:p:467-502

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  1. Guiso, Luigi & Parigi, Giuseppe, 1996. "Investment and Demand Uncertainty," CEPR Discussion Papers 1497, C.E.P.R. Discussion Papers.
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  8. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
  9. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
  10. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
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  13. Milne, Alistair & Robertson, Donald, 1996. "Firm behaviour under the threat of liquidation," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1427-1449, August.
  14. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  15. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, Department of Economics, University of Kent.
  16. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
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Cited by:
  1. Kaoru Hosono & Masaki Hotei & Chie Umezaki, 2013. "External Finance Constraints and the Timing of Investment Spikes," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(2), pages 365-404, March.
  2. Christian Bayer, 2001. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Discussion Papers in Economics 01_13, University of Dortmund, Department of Economics.
  3. Samu Peura & Esa Jokivuolle, 2004. "Simulation-based stress testing of banks’ regulatory capital adequacy," Finance 0405003, EconWPA.
  4. Christian Bayer, 2004. "On the Interaction of Financial Frictions and Fixed Capital Adjustment Costs: Evidence from a Panel of German Firms," Macroeconomics 0410006, EconWPA.
  5. Andrea Caggese, 2001. "Financing Constraints, Irreversibility, and Investment Dynamics," Working Papers 53, Barcelona Graduate School of Economics.
  6. Álvarez Echeverría Francisco & López Sarabia Pablo & Venegas Martínez Francisco, 2012. "Valuación financiera de proyectos de inversión en nuevas tecnologías con opciones reales," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 57(3), pages 115-145, julio-sep.
  7. Bazdresch, Santiago, 2013. "The role of non-convex costs in firms' investment and financial dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 929-950.
  8. Richard Holt, 2007. "Investment, irreversibility and financial imperfections: the rush to invest and the option to wait," Economics Bulletin, AccessEcon, vol. 5(10), pages 1-10.
  9. repec:ebl:ecbull:v:5:y:2007:i:10:p:1-10 is not listed on IDEAS
  10. Vercammen, James, 2003. "A Stochastic Dynamic Programming Model Of Direct Subsidy Payments And Agricultural Investment," Working Papers 15847, University of British Columbia, Food and Resource Economics.
  11. Deng, Lu & Li, Sifei & Liao, Mingqing & Wu, Weixing, 2013. "Dividends, investment and cash flow uncertainty: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 112-124.
  12. McGee, M. Kevin, 2010. "Twice constrained investment under uncertainty: A mixed time model," Research in Economics, Elsevier, vol. 64(2), pages 110-120, June.
  13. Alessandra Guariglia & John Tsoukalas & Serafeim Tsoukas, . "Investment, irreversibility, and financing constraints in transition economies," Discussion Papers 10/03, University of Nottingham, School of Economics.
  14. Barbara Pfeffer, 2008. "FDI and FPI - Strategic Complements?," MAGKS Papers on Economics 200812, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  15. Fernando Alexandre & Pedro Bação, 2005. "Monetary policy and asset prices: the investment channel," NIPE Working Papers 3/2005, NIPE - Universidade do Minho.
  16. Peura, Samu & Jokivuolle, Esa, 2003. "Simulation-based stress testing of banks’ regulatory capital adequacy," Research Discussion Papers 4/2003, Bank of Finland.
  17. Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.

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