Investment and Finance when Liquidation is Costly
Allard Bruinshoofd () and
Wilko Letterie ()
De Economist, 2004, vol. 152, issue 1, 45 pages
In this paper we investigate to what extent expected liquidation costs affect the dependence of a firm's investment decision on available finance. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large Dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs has additional explanatory power over other proxies for the premium on external finance -- like leverage, retention practice and firm size.
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