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Optimal investment with fixed refinancing costs

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Author Info
Jason G. Cummins
Ingmar Nyman

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Abstract

Case studies show that corporate managers seek financial independence to avoid interference by outside financiers. We incorporate this financial xenophobia as a fixed cost in a simple dynamic model of financing and investment. To avoid refinancing in the future, the firm alters its behavior depending on the extent of its financial xenophobia and the realization of a revenue shock. With a sufficiently adverse shock, the firm holds no liquidity. Otherwise, the firm precautionarily saves and holds both liquidity and external finance. Investment always responds to neoclassical fundamentals, but responds to cash flow only when the firm holds no liquidity.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-40.

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Date of creation: 2001
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Handle: RePEc:fip:fedgfe:2001-40

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Keywords: Corporations - Finance ; Financial institutions;

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  1. Daron Acemoglu, 1995. "Corporate Control and Balance of Powers," CEP Discussion Papers dp0239, Centre for Economic Performance, LSE.
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  2. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November. [Downloadable!] (restricted)
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  3. Stewart C. Myers, 2000. "Outside Equity," Journal of Finance, American Finance Association, vol. 55(3), pages 1005-1037, 06. [Downloadable!] (restricted)
  4. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June. [Downloadable!] (restricted)
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  5. Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers 520, Massachusetts Institute of Technology (MIT), Department of Economics.
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  6. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
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  1. Christopher F Baum, & Mustafa Caglayan & Neslihan Ozkan & Oleksandr Talavera, 2005. "The Impact of Macroeconomic Uncertainty onNon-Financial Firms’ Demandf or Liquidity," Working Papers 2005_26, Department of Economics, University of Glasgow. [Downloadable!]
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