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Twice constrained investment under uncertainty: A mixed time model

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  • McGee, M. Kevin
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    Abstract

    This paper explores the investment decision of a firm facing both an irreversibility constraint and a financial constraint on investment. I show that, for all but the fastest growing firms, the planned investment delaying impact of an irreversibility constraint dominates the planned investment accelerating impact of a financing constraint. This result is especially likely to hold in a reality where firms have a variety of strategies not modeled here, from holding cash reserves to taking on debt, that can mitigate the financing constraint.

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    File URL: http://www.sciencedirect.com/science/article/B6WWP-4Y2PGSN-1/2/a59f4cd7cee58f29e9eb0f71ca2f5f89
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    Bibliographic Info

    Article provided by Elsevier in its journal Research in Economics.

    Volume (Year): 64 (2010)
    Issue (Month): 2 (June)
    Pages: 110-120

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    Handle: RePEc:eee:reecon:v:64:y:2010:i:2:p:110-120

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    Web page: http://www.elsevier.com/locate/inca/622941

    Related research

    Keywords: Investment Uncertainty Irreversible Financing constraint;

    References

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    1. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Andrea Caggese, 2003. "Financing Constraints, Irreversibility, and Investment Dynamics," FMG Discussion Papers dp440, Financial Markets Group.
    5. Hans-Werner Sinn, 1991. "The Vanishing Harberger Triangle," NBER Working Papers 3225, National Bureau of Economic Research, Inc.
    6. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
    7. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
    8. Richard Holt, 2004. "Investment and Dividends under Irreversibility and Financial Constraints," ESE Discussion Papers 55, Edinburgh School of Economics, University of Edinburgh.
    9. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
    10. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
    11. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
    12. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
    13. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
    14. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
    15. Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October.
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