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The influence of financial constraints and real options on corporate investment decisions

  • Ekaterina Kuzmicheva

    ()

    (National Research University Higher School of Economics (Nizhny Novgorod, Russia))

  • Kirill Kuzmichev
Registered author(s):

    This paper presents evidence of the negative combined effect of financial constraints and real options on corporate investment. Using panel data on public companies functioning in developed countries, the authors prove that with increasing uncertainty surrounding a firm, the real options effect increases the influence of financial constraints on investment. To this end we have found the threshold value of the option multiple, which switches the uncertainty regimes from relatively high to relatively low, and we have constructed an index of financial constraints.

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    File URL: http://www.hse.ru/data/2013/09/18/1275665084/17FE2013.pdf
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    Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 17/FE/2013.

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    Length: 21 pages
    Date of creation: 2013
    Date of revision:
    Publication status: Published in WP BRP Series: Financial Economics / FE, September 2013, pages 1-21
    Handle: RePEc:hig:wpaper:17/fe/2013
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    1. Whited, Toni M, 1998. "Why Do Investment Euler Equations Fail?," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 479-88, October.
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    5. Pindyck, Robert S. & Solimano, Andrés., 1993. "Economic instability and aggregate investment," Working papers 3552-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October.
    8. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    9. Hong Bo & Jan Jacobs & Elmer Sterken, 2006. "A threshold uncertainty investment model for the Netherlands," Applied Financial Economics, Taylor & Francis Journals, vol. 16(9), pages 665-673.
    10. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    11. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
    12. Bo, Hong & Sterken, Elmer, 2007. "Attitude towards risk, uncertainty, and fixed investment," The North American Journal of Economics and Finance, Elsevier, vol. 18(1), pages 59-75, February.
    13. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
    14. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    15. Xie, Feixue, 2009. "Managerial flexibility, uncertainty, and corporate investment: The real options effect," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 643-655, October.
    16. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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