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The Value of Financial Flexibility

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  • Andrea Gamba
  • Alexander J. Triantis

Abstract

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity. Copyright (c) 2008 The American Finance Association.

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File URL: http://web.warwick.ac.uk/fac/soc/financeRepec/Repec/2007/GambaTriantis2007TVFF.pdf
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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wpn07-02.

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Date of creation: 2007
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Handle: RePEc:wbs:wpaper:wpn07-02

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  7. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
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  16. Gordon A. Sick, 1990. "Tax-Adjusted Discount Rates," Management Science, INFORMS, vol. 36(12), pages 1432-1450, December.
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  18. Christopher Hennessy & Toni Whited, 2004. "Debt Dynamics," 2004 Meeting Papers 592, Society for Economic Dynamics.
  19. Moyen, Nathalie, 2007. "How big is the debt overhang problem?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 433-472, February.
  20. Coleman, Wilbur John, II, 1990. "Solving the Stochastic Growth Model by Policy-Function Iteration," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 27-29, January.
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  22. Lee Pinkowitz & René Stulz & Rohan Williamson, 2006. "Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross-country Analysis," Journal of Finance, American Finance Association, vol. 61(6), pages 2725-2751, December.
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