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Investment Timing when External Financing is Costly
Author(s) -
Hirth Stefan,
UhrigHomburg Marliese
Publication year - 2010
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2010.02206.x
Subject(s) - investment (military) , market liquidity , internal financing , constraint (computer aided design) , monetary economics , liquidity constraint , finance , economics , funding liquidity , return on investment , external financing , dimension (graph theory) , liquidity crisis , business , microeconomics , production (economics) , information asymmetry , mechanical engineering , debt , mathematics , politics , pure mathematics , political science , law , engineering
This paper analyzes the investment timing of firms facing two dimensions of financing constraints: Liquidity constraints and capital market frictions inducing financing costs. We show that liquidity constraints are not sufficient to explain voluntary investment delay. However, when additionally considering financing costs, we can explain both voluntary delay and acceleration of investment. More precisely, we find that investment thresholds are U‐shaped in liquid funds. For high‐liquidity firms, investment thresholds are decreasing (i.e., accelerated investment takes place) in either dimension of financing constraint. In contrast, investment thresholds are increasing (i.e., investment is further delayed) in either form of financing constraint for low‐liquidity firms. For intermediate levels of liquidity, investment thresholds are U‐shaped in market frictions.