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Investment and Dividends under Irreversibility and Financial Constraints (first version)

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  • Richard Holt

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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

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 49.

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Date of creation: Apr 2004
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Handle: RePEc:edn:esedps:49

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