IDEAS home Printed from https://ideas.repec.org/p/fth/pennfi/19-85.html
   My bibliography  Save this paper

A Dynamic Model of Optimal Investment and Financial Policies with Costs of Adjustment and Leverage

Author

Listed:
  • Andrew W. Lo

Abstract

In this study, a dynamic-optimizing framework is developed in which the interaction between the firm’s real and financial decisions may be examined. The derivation of the objective function is based explicitly on the maximization of shareholder wealth subject to the firm’s cashflow and capital accumulation constraints. By incorporating the financial aspects of investment into a model of optimal capital accumulation, it is shown that changes in "q" may affect the firm's capital structure as well as its investment policies. Although an increase in q generally implies an increase in investment, its impact upon capital structure is shown to depend upon how the marginal costs of leverage vary with investment. It is also demonstrated that marginal q equals a particular tax-adjusted average q which renders the relation between q and capital structure a testable hypothesis.

Suggested Citation

  • Andrew W. Lo, "undated". "A Dynamic Model of Optimal Investment and Financial Policies with Costs of Adjustment and Leverage," Rodney L. White Center for Financial Research Working Papers 19-85, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:19-85
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:19-85. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel). General contact details of provider: http://edirc.repec.org/data/rwupaus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.