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Investment, Uncertainty, and Liquidity
Author(s) -
Boyle Glenn W.,
Guthrie Graeme A.
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00600
Subject(s) - liquidity constraint , investment (military) , market liquidity , cash flow , constraint (computer aided design) , economics , monetary economics , capital market imperfections , investment decisions , value (mathematics) , microeconomics , business , finance , capital market , production (economics) , mechanical engineering , machine learning , politics , law , political science , computer science , engineering
We analyze the dynamic investment decision of a firm subject to an endogenous financing constraint. The threat of future funding shortfalls lowers the value of the firm's timing options and encourages acceleration of investment beyond the first‐best optimal level. As well as highlighting another way by which capital market frictions can distort investment behavior, this result implies that (1) the sensitivity of investment to cash flow can be greatest for high‐liquidity firms and (2) greater uncertainty has an ambiguous effect on investment.