Investment and Financing Decisions when Liquidation is Costly
Allard Bruinshoofd () and
Wilko Letterie ()
WO Research Memoranda (discontinued) from Netherlands Central Bank, Research Department
In this paper we investigate how expected liquidation costs affect a firm's investment and financing decisions. 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 does not convey the same information that other proxies for the premium on external finance - like leverage, retention practice or firm size - already contain.
Keywords: Investment policy; financing policy; liquidation cost; sales comovement (search for similar items in EconPapers)
JEL-codes: G31 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:wormem:721
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