Investment and Dividends under Irreversibility and Financial Constraints
AbstractResearch 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 InfoPaper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 55.
Date of creation: Apr 2004
Date of revision:
Investment; dividend policy; irreversibility; financial constraints;
Other versions of this item:
- Holt, Richard W. P., 2003. "Investment and dividends under irreversibility and financial constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 27(3), pages 467-502, January.
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-25 (All new papers)
- NEP-CFN-2004-04-25 (Corporate Finance)
- NEP-MAC-2004-04-25 (Macroeconomics)
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