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Optimal investment with fixed financing costs

Author Info

  • Cummins, Jason G.
  • Nyman, Ingmar

Abstract

Case studies show that corporate managers seek financial independence to avoid interference by outside financiers. We incorporate this financial xenophobia as a fixed cost in a simple dynamic model of financing and investment. To avoid refinancing in the future, the firm alters its behavior depending on the extent of its financial xenophobia and the realization of a revenue shock. With a sufficiently adverse shock, the firm holds no liquidity. Otherwise, the firm precautionarily saves and holds both liquidity and external finance. Investment always responds to neoclassical fundamentals, but responds to cash flow only when the firm holds no liquidity.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 1 (2004)
Issue (Month): 4 (December)
Pages: 226-235

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Handle: RePEc:eee:finlet:v:1:y:2004:i:4:p:226-235
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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Cited by:

  1. Christopher F Baum, & Mustafa Caglayan & Neslihan Ozkan & Oleksandr Talavera, 2005. "The Impact of Macroeconomic Uncertainty onNon-Financial Firms’ Demandf or Liquidity," Working Papers 2005_26, Business School - Economics, University of Glasgow.
  2. Andrea L. Eisfeldt & Tyler Muir, 2014. "Aggregate Issuance and Savings Waves," NBER Working Papers 20442, National Bureau of Economic Research, Inc.
  3. Tyler Muir & Andrea Eisfeldt, 2012. "The Joint Dynamics of Internal and External Finance," 2012 Meeting Papers 842, Society for Economic Dynamics.
  4. Christopher F. Baum & Atreya Chakraborty & Liyan Han & Boyan Liu, 2012. "The effects of uncertainty and corporate governance on firms’ demand for liquidity," Applied Economics, Taylor & Francis Journals, vol. 44(4), pages 515-525, February.

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