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Investment and Dividends under Irreversibility and Financial Constraints

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  • Richard W P Holt

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. he 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 he revenue function is capital stock and the complementarily of the constraints drive these results. Important ramifications for empirical work on investment are discussed.

Suggested Citation

  • Richard W P Holt, 2000. "Investment and Dividends under Irreversibility and Financial Constraints," Edinburgh School of Economics Discussion Paper Series 55, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:55
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    References listed on IDEAS

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    More about this item

    Keywords

    investment; dividend policy; irreversibility; financial constraints;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; 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

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