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Investment Timing when External Financing is Costly

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  • Stefan Hirth
  • Marliese Uhrig-Homburg

Abstract

This paper analyzes the investment timing of firms facing two dimensions of financing constraints: Liquidity constraints and capital market frictions inducing financing costs. We show that liquidity constraints are not sufficient to explain voluntary investment delay. However, when additionally considering financing costs, we can explain both voluntary delay and acceleration of investment. More precisely, we find that investment thresholds are U-shaped in liquid funds. For high-liquidity firms, investment thresholds are decreasing (i.e., accelerated investment takes place) in either dimension of financing constraint. In contrast, investment thresholds are increasing (i.e., investment is further delayed) in either form of financing constraint for low-liquidity firms. For intermediate levels of liquidity, investment thresholds are U-shaped in market frictions. Copyright (c) 2010 Blackwell Publishing Ltd.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jbfnac:v:37:y:2010-07:i:7-8:p:929-949
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    References listed on IDEAS

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    Cited by:

    1. Nishihara, Michi & Shibata, Takashi, 2013. "The effects of external financing costs on investment timing and sizing decisions," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1160-1175.
    2. George W. Blazenko & Andrey D. Pavlov, 2010. "Investment Timing for New Business Ventures," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 37-68, Fall.
    3. 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.
    4. Luo, Pengfei & Wang, Huamao & Yang, Zhaojun, 2016. "Investment and financing for SMEs with a partial guarantee and jump risk," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1161-1168.
    5. repec:rss:jnljef:v4i2p4 is not listed on IDEAS
    6. 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.
    7. Hirth, Stefan & Viswanatha, Marc, 2011. "Financing constraints, cash-flow risk, and corporate investment," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1496-1509.
    8. Mehrmann, Annika & Schneider, Georg & Sureth, Caren, 2012. "Asymmetric taxation of profits and losses and its influence on investment timing: Paradoxical effects of tax increases," arqus Discussion Papers in Quantitative Tax Research 134, arqus - Arbeitskreis Quantitative Steuerlehre.
    9. Monica Neamtiu & Nemit Shroff & Hal D. White & Christopher D. Williams, 2014. "The Impact of Ambiguity on Managerial Investment and Cash Holdings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1071-1099, September.
    10. Kisser, Michael, 2010. "Do all-equity firms destroy value by holding cash?," Discussion Papers 2010/17, Norwegian School of Economics, Department of Business and Management Science.
    11. Sanyal, Paroma & Bulan, Laarni T., 2011. "Regulatory risk, market uncertainties, and firm financing choices: Evidence from U.S. Electricity Market Restructuring," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 248-268, June.

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