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The effects of external financing costs on investment timing and sizing decisions

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  • Nishihara, Michi
  • Shibata, Takashi
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    Abstract

    We develop a dynamic model in which a firm exercises an option to expand production on either a small or large scale with cash reserves and costly external funds. An intermediate level of cash reserves, which is insufficient for the large-scale investment but sufficient for the small-scale investment, provides an incentive for the firm to invest early in the small-scale project. These results fill the gap between two types of results: (i) empirical findings of a U-shaped relation between the investment volume and internal funds and (ii) empirical predictions of a U-shaped relation between the investment timing and internal funds. In addition, our results have real-world implications for investment in alternative projects.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 4 ()
    Pages: 1160-1175

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:4:p:1160-1175

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Investment timing; Investment size; Costly external financing; Optimal stopping;

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    References

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    Cited by:
    1. Ming, Zeng & Ximei, Liu & Yulong, Li & Lilin, Peng, 2014. "Review of renewable energy investment and financing in China: Status, mode, issues and countermeasures," Renewable and Sustainable Energy Reviews, Elsevier, vol. 31(C), pages 23-37.
    2. Nishihara, Michi & Shibata, Takashi, 2014. "Preemption, leverage, and financing constraints," Review of Financial Economics, Elsevier, vol. 23(2), pages 75-89.

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