On the Role of External Financing Costs in Optimal Investment Decisions
AbstractThis paper brings into focus a link between the investment and financing decisions of a firm which has an access to costly debt financing. Our analysis shows that lump-sum debt issuance costs play a prominent role in a determination of the optimal investment strategy. Faced with larger lump-sum debt issuance costs, a firm will optimally set up a higher-scale investment project in order to "compensate" dead-weight financing costs by higher return. Moreover, in the presence of lump-sum debt issuance costs, the optimal investment scale of financially constrained firms exhibits an inverted U-shaped relationship with the firm's borrowing capacity, so that relatively more/less constrained firms will realize smaller investment projects, whereas firms with an intermediate borrowing capacity will undertake larger investment.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00793688.
Date of creation: Dec 2012
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00793688
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
real options; investment intensity; debt issuance costs; credit constraints;
Other versions of this item:
- Mohamed Belhaj & Nataliya Klimenko, 2012. "On the Role of External Financing Costs in Optimal Investment Decisions," AMSE Working Papers 1241, Aix-Marseille School of Economics, Marseille, France.
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988.
"Financing Constraints and Corporate Investment,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
- Guariglia, Alessandra, 2008.
"Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms,"
Journal of Banking & Finance,
Elsevier, vol. 32(9), pages 1795-1809, September.
- Alessandra Guariglia, . "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Discussion Papers 07/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
- Lyandres, Evgeny, 2007. "Costly external financing, investment timing, and investment-cash flow sensitivity," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 959-980, December.
- Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
- Cleary, Sean & Povel, Paul E M & Raith, Michael, 2004.
"The U-Shaped Investment Curve: Theory and Evidence,"
CEPR Discussion Papers
4206, C.E.P.R. Discussion Papers.
- Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 1-39, March.
- Sean Cleary & Paul Povel & Michael Raith, 2003. "The U-shaped Investment Curve: Theory and Evidence," Finance 0311010, EconWPA.
- Stefan Hirth & Marliese Uhrig-Homburg, 2010. "Investment Timing when External Financing is Costly," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 929-949.
- Kit Wong, 2010. "On the neutrality of debt in investment intensity," Annals of Finance, Springer, vol. 6(3), pages 335-356, July.
- Sarkar, Sudipto, 2011. "Optimal size, optimal timing and optimal financing of an investment," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 681-689.
- Whited, Toni M, 1992.
" Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data,"
Journal of Finance,
American Finance Association, vol. 47(4), pages 1425-60, September.
- Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series 114, Board of Governors of the Federal Reserve System (U.S.).
- Mohamed BELHAJ & Bertrand DJEMBISSI, 2009. "Optimal Investment under Credit Constraints," Annales d'Economie et de Statistique, ENSAE, issue 93-94, pages 259-277.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.