Financing constraints, cash-flow risk, and corporate investment
Using an analytically tractable two-period model of a financially constrained firm, we derive an investment threshold that is U-shaped in cash holdings. We show analytically the relevant trade-offs leading to the U-shape: the firm balances financing costs for present and future investment, respectively. Our main argument is that financing costs today are more important than the risk of future financing costs. The empirically testable implications are that low-cash firms facing financing costs today are more reluctant to invest if they have less cash, or if their future cash flows are more risky. On the other hand, cash-rich firms facing no financing costs today invest in less favorable projects (i.e., forgo their real option to wait) if they have less cash, or if their future cash flows are more risky. The magnitude of these effects is amplified by the degree of market frictions that the firms are facing.
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): 17 (2011)
Issue (Month): 5 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/jcorpfin|
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.:
- Ang, James & Smedema, Adam, 2011. "Financial flexibility: Do firms prepare for recession?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 774-787, June.
- Whited, Toni M., 2006. "External finance constraints and the intertemporal pattern of intermittent investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 467-502, September.
- Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011.
"Corporate financial and investment policies when future financing is not frictionless,"
Journal of Corporate Finance,
Elsevier, vol. 17(3), pages 675-693, June.
- Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2006. "Corporate Financial and Investment Policies when Future Financing is not Frictionless," NBER Working Papers 12773, National Bureau of Economic Research, Inc.
- Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2008. "Corporate Financial and Investment Policies When Future Financing Is Not Frictionless," Working Paper Series 2008-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- 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.
- 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.
- Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
- Hirth, Stefan & Uhrig-Homburg, Marliese, 2010. "Investment timing, liquidity, and agency costs of debt," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 243-258, April.
- Hirth, Stefan & Uhrig-Homburg, Marliese, 2009. "Investment Timing, Liquidity, and Agency Costs of Debt," Finance Research Group Working Papers F-2009-04, University of Aarhus, Aarhus School of Business, Department of Business Studies.
- Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October.
- 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.
- Bolton, Patrick & Chen, Hui & Wang, Neng, 2013. "Market timing, investment, and risk management," Journal of Financial Economics, Elsevier, vol. 109(1), pages 40-62.
- Patrick Bolton & Hui Chen & Neng Wang, 2011. "Market Timing, Investment, and Risk Management," NBER Working Papers 16808, National Bureau of Economic Research, Inc.
- 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.
- Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:17:y:2011:i:5:p:1496-1509. 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: (Dana Niculescu)
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.