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Investment and Financing Decisions when Liquidation is Costly

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  • W.A. Bruinshoofd
  • W.A. Letterie

Abstract

In this paper we investigate how expected liquidation costs affect a firm's investment and financing decisions. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large Dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs does not convey the same information that other proxies for the premium on external finance - like leverage, retention practice or firm size - already contain.

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File URL: http://www.dnb.nl/binaries/wo0721_tcm46-146014.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 721.

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Date of creation: 2003
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Handle: RePEc:dnb:wormem:721

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Keywords: Investment policy; financing policy; liquidation cost; sales comovement;

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