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Investment and Financing Decisions when Liquidation is Costly

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  • W.A. Bruinshoofd
  • W.A. Letterie

Abstract

In this paper we investigate how expected liquidation costs affect a firm's investment and financing decisions. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large Dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs does not convey the same information that other proxies for the premium on external finance - like leverage, retention practice or firm size - already contain.

Suggested Citation

  • W.A. Bruinshoofd & W.A. Letterie, 2003. "Investment and Financing Decisions when Liquidation is Costly," WO Research Memoranda (discontinued) 721, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:721
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    More about this item

    Keywords

    Investment policy; financing policy; liquidation cost; sales comovement;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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