The Value of Financial Flexibility
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.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 63 (2008)
Issue (Month): 5 (October)
|Contact details of provider:|| Web page: http://www.afajof.org/|
More information through EDIRC
|Order Information:||Web: http://www.afajof.org/membership/join.asp|
References listed on IDEAS
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.:
- Christopher A. Hennessy & Toni M. Whited, 2005.
Journal of Finance,
American Finance Association, vol. 60(3), pages 1129-1165, 06.
- Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
- Mello, Antonio S & Parsons, John E, 1992. " Measuring the Agency Cost of Debt," Journal of Finance, American Finance Association, vol. 47(5), pages 1887-904, December.
- Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997.
"The Determinants and Implications of Corporate Cash Holdings,"
NBER Working Papers
6234, National Bureau of Economic Research, Inc.
- Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
- Brennan, Michael J & Schwartz, Eduardo S, 1984. " Optimal Financial Policy and Firm Valuation," Journal of Finance, American Finance Association, vol. 39(3), pages 593-607, July.
- John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
- Mauer, David C & Triantis, Alexander J, 1994. " Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework," Journal of Finance, American Finance Association, vol. 49(4), pages 1253-77, September.
- Moyen, Nathalie, 2007. "How big is the debt overhang problem?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 433-472, February.
- Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
- 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.
- Gordon A. Sick, 1990. "Tax-Adjusted Discount Rates," Management Science, INFORMS, vol. 36(12), pages 1432-1450, December.
- Jarrad Harford, 1999. "Corporate Cash Reserves and Acquisitions," Journal of Finance, American Finance Association, vol. 54(6), pages 1969-1997, December.
- Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
- Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
- Franck Bancel & Usha R. Mittoo, 2004. "Cross-Country Determinants of Capital Structure Choice: A Survey of European Firms," Financial Management, Financial Management Association, vol. 33(4), Winter.
- Mikkelson, Wayne H. & Partch, M. Megan, 2003. "Do Persistent Large Cash Reserves Hinder Performance?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 275-294, June.
- 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.
- Nathalie Moyen, 2004. "Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms," Journal of Finance, American Finance Association, vol. 59(5), pages 2061-2092, October.
- Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
- Baxter, Marianne & Crucini, Mario J & Rouwenhorst, K Geert, 1990. "Solving the Stochastic Growth Model by a Discrete-State-Space, Euler-Equation Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 19-21, January.
- Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
- Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2003. "International Corporate Governance and Corporate Cash Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 111-133, March.
When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:63:y:2008:i:5:p:2263-2296. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.