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Investment frictions and leverage dynamics

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  • Tsyplakov, Sergey
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    Abstract

    The paper examines the effect of investment frictions on leverage dynamics, using a model of a firm whose investment projects are (1) indivisible and lumpy, and (2) subject to time-to-build. Regressions on the model-simulated data demonstrate that investment frictions can provide alternative interpretations of the observed leverages shown in the empirical literature. Cross-sectional analysis of firms in the oil and gas extraction industries, as well as analysis across all industries, reveals the evidence that small firms have more volatile investments and longer time-to-build, which may explain the observed differences in leverage dynamics across small and large firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 89 (2008)
    Issue (Month): 3 (September)
    Pages: 423-443

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    Handle: RePEc:eee:jfinec:v:89:y:2008:i:3:p:423-443

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Dynamic capital structure Time-to-build Lumpy investments Market timing;

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    Cited by:
    1. Michi NISHIHARA & Takashi SHIBATA, 2012. "The effects of external financing costs on investment timing and sizing decisions," Discussion Papers in Economics and Business 12-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    2. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, 03.
    3. Venkiteshwaran, Vinod, 2011. "Partial adjustment toward optimal cash holding levels," Review of Financial Economics, Elsevier, vol. 20(3), pages 113-121, August.
    4. : Andrea Gamba & : Alexander J. Triantis, 2013. "How Effectively Can Debt Covenants Alleviate Financial Agency Problems?," Working Papers wpn13-08, Warwick Business School, Finance Group.
    5. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    6. Dudley, Evan, 2012. "Capital structure and large investment projects," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1168-1192.
    7. Nishihara, Michi & Shibata, Takashi, 2013. "The effects of external financing costs on investment timing and sizing decisions," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1160-1175.
    8. Alessandra Guariglia & John Tsoukalas & Serafeim Tsoukas, . "Investment, irreversibility, and financing constraints in transition economies," Discussion Papers 10/03, University of Nottingham, School of Economics.
    9. Myklebust, Tor Åge, 2012. "Performance Sensitive Debt - Investment and Financing Incentives," Discussion Papers 2012/7, Department of Business and Management Science, Norwegian School of Economics.

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