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Investment Frictions versus Financing Frictions


  • Takao Kobayashi

    (Faculty of Economics, University of Tokyo)

  • Risa Sai

    (Graduate School of Economics, University of Tokyo)


Bertola/Caballero (1994) and Abel/Eberly (1996) extended Jorgenson's classical model of firms' optimal investment. By introducing investment frictions, they were able to capture the role of future anticipations in investment decisions as well as the lumpy and intermittent nature of investment dynamics. We extend Jorgenson's model to the other direction of financing frictions. We construct a model of an equity-only firm, who must pay a linear financing cost for issuing new shares. We show that the firm's optimal investment-financing is a two-trigger policy in which the firm finances investment by issuing new shares (supplementing internal funds) when the shadow price of capital hits the upper trigger value. When the shadow price hits the lower trigger value, she sells a portion of her capital stock and buys back shares (or pays dividends). Values of the shadow price of capital between the two trigger values define a range of "inaction", in which the firm does neither issue nor buy back shares and invests all of her internal funds for expansion.

Suggested Citation

  • Takao Kobayashi & Risa Sai, 2009. "Investment Frictions versus Financing Frictions," CIRJE F-Series CIRJE-F-627, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2009cf627

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    References listed on IDEAS

    1. Whited, Toni M., 2006. "External finance constraints and the intertemporal pattern of intermittent investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 467-502, September.
    2. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    3. Andrew B. Abel & Janice C. Eberly, 1996. "Optimal Investment with Costly Reversibility," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 581-593.
    4. Mussa, Michael L, 1977. "External and Internal Adjustment Costs and the Theory of Aggregate and Firm Investment," Economica, London School of Economics and Political Science, vol. 44(174), pages 163-178, May.
    5. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, June.
    6. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
    7. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    8. Uzawa, H, 1969. "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 628-652, Part II, .
    9. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
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