Investment Timing when External Financing is Costly

Authors

  • Stefan Hirth,

    1. The authors are respectively from Aarhus School of Business, Denmark and Karlsruhe Institute of Technology (KIT), Germany. They would like to thank an anonymous referee, Nicole Branger, Athanasios Episcopos, Christian Riis Flor, Alexander Groh, Yalın Gündüz, Karl Ludwig Keiber, Olaf Korn, Joachim Moser, Martin Ruckes, Jan Seifert, and Rosanne Vanpee, as well as conference participants at OR 2004 Tilburg, DGF 2004 Doctoral Student Seminar Tübingen, Campus for Finance 2005 Vallendar, Swiss Society for Financial Market Research 2005 Zurich, FMA European Conference 2005 Siena, DGF 2005 Augsburg, Verein für Socialpolitik 2005 Bonn, Symposium on Finance, Banking, and Insurance 2005 Karlsruhe, and IFSAM 2006 Berlin, and seminar participants at University of Southern Denmark Odense, for their helpful comments and suggestions.
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  • Marliese Uhrig-Homburg

    Corresponding author
    1. The authors are respectively from Aarhus School of Business, Denmark and Karlsruhe Institute of Technology (KIT), Germany. They would like to thank an anonymous referee, Nicole Branger, Athanasios Episcopos, Christian Riis Flor, Alexander Groh, Yalın Gündüz, Karl Ludwig Keiber, Olaf Korn, Joachim Moser, Martin Ruckes, Jan Seifert, and Rosanne Vanpee, as well as conference participants at OR 2004 Tilburg, DGF 2004 Doctoral Student Seminar Tübingen, Campus for Finance 2005 Vallendar, Swiss Society for Financial Market Research 2005 Zurich, FMA European Conference 2005 Siena, DGF 2005 Augsburg, Verein für Socialpolitik 2005 Bonn, Symposium on Finance, Banking, and Insurance 2005 Karlsruhe, and IFSAM 2006 Berlin, and seminar participants at University of Southern Denmark Odense, for their helpful comments and suggestions.
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Address for correspondence: Stefan Hirth, Aarhus School of Business, Aarhus University, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark.
e-mail: stefanh@asb.dk.

Abstract

Abstract:  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.

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