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The influence of financial constraints and real options on corporate investment decisions

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  • Ekaterina Kuzmicheva

    ()
    (National Research University Higher School of Economics (Nizhny Novgorod, Russia))

  • Kirill Kuzmichev
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    Abstract

    This paper presents evidence of the negative combined effect of financial constraints and real options on corporate investment. Using panel data on public companies functioning in developed countries, the authors prove that with increasing uncertainty surrounding a firm, the real options effect increases the influence of financial constraints on investment. To this end we have found the threshold value of the option multiple, which switches the uncertainty regimes from relatively high to relatively low, and we have constructed an index of financial constraints.

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    File URL: http://www.hse.ru/data/2013/09/18/1275665084/17FE2013.pdf
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    Bibliographic Info

    Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 17/FE/2013.

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    Length: 21 pages
    Date of creation: 2013
    Date of revision:
    Publication status: Published in WP BRP Series: Financial Economics / FE, September 2013, pages 1-21
    Handle: RePEc:hig:wpaper:17/fe/2013

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    Keywords: investment decisions; index of financial constraints; real options to delay;

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    1. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    2. Caballero, Ricardo J & Pindyck, Robert S, 1996. "Uncertainty, Investment, and Industry Evolution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-62, August.
    3. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    4. Hong Bo & Jan Jacobs & Elmer Sterken, 2006. "A threshold uncertainty investment model for the Netherlands," Applied Financial Economics, Taylor & Francis Journals, vol. 16(9), pages 665-673.
    5. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
    6. Whited, Toni M, 1998. "Why Do Investment Euler Equations Fail?," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 479-88, October.
    7. 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.).
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Bo, Hong & Sterken, Elmer, 2007. "Attitude towards risk, uncertainty, and fixed investment," The North American Journal of Economics and Finance, Elsevier, vol. 18(1), pages 59-75, February.
    10. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    11. Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October.
    12. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    13. Xie, Feixue, 2009. "Managerial flexibility, uncertainty, and corporate investment: The real options effect," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 643-655, October.
    14. Bruce C. Greenwald & Joseph E. Stiglitz & Andrew Weiss, 1984. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations," NBER Working Papers 1335, National Bureau of Economic Research, Inc.
    15. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
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