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Optimal investment with fixed refinancing costs

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  • Jason G. Cummins
  • Ingmar Nyman

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.

Suggested Citation

  • Jason G. Cummins & Ingmar Nyman, 2001. "Optimal investment with fixed refinancing costs," Finance and Economics Discussion Series 2001-40, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2001-40
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    References listed on IDEAS

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    Cited by:

    1. Eisfeldt, Andrea L. & Muir, Tyler, 2016. "Aggregate external financing and savings waves," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 116-133.
    2. 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.
    3. repec:eme:ijmfpp:ijmf-12-2015-0210 is not listed on IDEAS
    4. Baum, Christopher F. & Caglayan, Mustafa & Ozkan, Neslihan & Talavera, Oleksandr, 2006. "The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity," Review of Financial Economics, Elsevier, vol. 15(4), pages 289-304.
    5. Andrea L. Eisfeldt & Tyler Muir, 2014. "Aggregate External Financing and Savings Waves," NBER Working Papers 20442, National Bureau of Economic Research, Inc.
    6. Tyler Muir & Andrea Eisfeldt, 2012. "The Joint Dynamics of Internal and External Finance," 2012 Meeting Papers 842, Society for Economic Dynamics.
    7. 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.
    8. Atreya Chakraborty & Christopher F. Baum & Boyan Liu, 2017. "Corporate financial policy and the value of cash under uncertainty," International Journal of Managerial Finance, Emerald Group Publishing, vol. 13(2), pages 149-164, April.

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    Keywords

    Corporations - Finance ; Financial institutions;

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