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Investment policy with time-to-build

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  • Sarkar, Sudipto
  • Zhang, Chuanqian

Abstract

Most capital projects have an implementation lag. We examine the effect of implementation lag on a levered firm’s investment decision. The main finding is that implementation lag can potentially have a substantial effect on a levered company’s investment trigger, and this effect can be significantly different from that of an unlevered company. The exact relationship between lag and investment trigger depends on the level of debt used by the firm. For an optimally-levered firm, a crucial determinant of the lag-investment relationship is the fraction of investment cost that has to be incurred upfront. If this fraction is small, investment trigger is a decreasing function of implementation lag and the effect can be economically significant. If this fraction is large, investment trigger can be either increasing or decreasing in lag, depending on parameter values, but the magnitude of the effect is not large. Optimally levering a firm makes the implementation lag more investment-friendly relative to an unlevered firm, thus it is possible that the lag has a negative effect on investment if the firm is unlevered but a positive effect if the same firm is optimally-levered. For an optimally-levered firm, implementation lag generally has a non-negative effect on investment.

Suggested Citation

  • Sarkar, Sudipto & Zhang, Chuanqian, 2015. "Investment policy with time-to-build," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 142-156.
    • Handle: RePEc:eee:jbfina:v:55:y:2015:i:c:p:142-156
    DOI: 10.1016/j.jbankfin.2015.02.016
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    Cited by:

    1. Jukka Lempa, 2020. "Some results on optimal stopping under phase-type distributed implementation delay," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 91(3), pages 559-583, June.
    2. Zhiming Ao & Ziyue Chen & He Nie, 2022. "Time to build, financial frictions, and the effectiveness of fiscal stimulus," Financial Economics Letters, Anser Press, vol. 1(1), pages 21-28, December.
    3. Jeon, Haejun, 2021. "Investment and financing decisions in the presence of time-to-build," European Journal of Operational Research, Elsevier, vol. 288(3), pages 1068-1084.
    4. Jeon, Haejun, 2021. "Investment timing and capacity decisions with time-to-build in a duopoly market," Journal of Economic Dynamics and Control, Elsevier, vol. 122(C).
    5. Armerin, Fredrik & Song, Han-Suck, 2020. "A framework for modelling cash flow lags," Working Paper Series 20/17, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    6. Lu, Jin-Ray & Hwang, Chih-Chiang & Lin, Chien-Yi, 2016. "Do shareholders appreciate capital investment policies of corporations?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 344-353.
    7. Leon A. Petrosyan & David W.K. Yeung, 2020. "Cooperative Dynamic Games with Durable Controls: Theory and Application," Dynamic Games and Applications, Springer, vol. 10(4), pages 872-896, December.
    8. Fredrik Armerin & Han-Suck Song, 2021. "A framework for modelling cash flow lags," SN Business & Economics, Springer, vol. 1(10), pages 1-13, October.
    9. Delaney, L., 2020. "A Model of Investment under Uncertainty with Time to Build, Market Incompleteness and Risk Aversion," Working Papers 20/13, Department of Economics, City University London.
    10. Delaney, Laura, 2021. "A model of investment under uncertainty with time to build, market incompleteness and risk aversion," European Journal of Operational Research, Elsevier, vol. 293(3), pages 1155-1167.

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    More about this item

    Keywords

    Implementation lag; Time-to-build; Investment trigger;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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