 Dynamic corporate investment and liquidity management under model uncertaintyYaoyao Wu, Jinqiang Yang and Zhentao Zou Economics Letters, 2017, vol. 155, issue C, 9-13 Abstract: We extend the model of dynamic investment and liquidity management for financially constrained firms (Bolton et al., 2011) by incorporating model uncertainty. Our theoretical model predicts that different from traditional business risk model uncertainty and concerning about model misspecification have ambiguous effects on the investment behavior and liquidity management, which depends on the firm’s liquidity measured by firm’s cash–capital ratio w=W∕K. It shows that model uncertainty induces the firm to under-invest when the firm has sufficient cash. However, the firm prefers over-investing as its liquidity is essentially low. Moreover, an increasing in model uncertainty accelerates firm’s payout while an increasing in business risk will delay the firm to pay out cash. Finally, it shows that model uncertainty significantly lowers a firm’s average q and marginal q as well as marginal value of liquidity. Keywords: Model uncertainty; Investment; Liquidity management; q theory (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:155:y:2017:i:c:p:9-13 DOI: 10.1016/j.econlet.2017.03.006 Access Statistics for this article Economics Letters is currently edited by Economics Letters Editorial Office More articles in Economics Letters from Elsevier |
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