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Investment frictions and leverage dynamics

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  • Tsyplakov, Sergey

Abstract

The paper examines the effect of investment frictions on leverage dynamics, using a model of a firm whose investment projects are (1) indivisible and lumpy, and (2) subject to time-to-build. Regressions on the model-simulated data demonstrate that investment frictions can provide alternative interpretations of the observed leverages shown in the empirical literature. Cross-sectional analysis of firms in the oil and gas extraction industries, as well as analysis across all industries, reveals the evidence that small firms have more volatile investments and longer time-to-build, which may explain the observed differences in leverage dynamics across small and large firms.

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  • Tsyplakov, Sergey, 2008. "Investment frictions and leverage dynamics," Journal of Financial Economics, Elsevier, vol. 89(3), pages 423-443, September.
  • Handle: RePEc:eee:jfinec:v:89:y:2008:i:3:p:423-443
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    11. Michi Nishihara & Takashi Shibata, 2010. "Interactions between Preemptive Competition and a Financing Constraint," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 1013-1042, December.
    12. Grundy, Bruce D. & Verwijmeren, Patrick, 2020. "The external financing of investment," Journal of Corporate Finance, Elsevier, vol. 65(C).
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