Severity of financing constraints and firms' investments

Tetsuya Kasahara

Review of Financial Economics, 2008, vol. 17, issue 2, 112-129

Abstract: According to standard investment theory, the current investments of more financially constrained firms should be smaller than those of less constrained firms with similar investment opportunities. In this paper, I develop a dynamic investment model in which the project value and the severity of financing constraints can vary over time. My results contradict standard theory. To preempt further financing risk in the future, severely constrained firms may engage in more active investment behavior even if they face relatively high additional financing costs at the time. My numerical example demonstrates that a relatively low probability of future risk is sufficient to cause such preemptive behavior.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1058-3300(07)00021-3
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:17:y:2008:i:2:p:112-129

Access Statistics for this article

Review of Financial Economics is currently edited by T. K. Mukherjee and G. Whitney

More articles in Review of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().