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Investment and Financing Decisions when Liquidation is Costly

Allard Bruinshoofd () and Wilko Letterie ()

WO Research Memoranda (discontinued) from Netherlands Central Bank, Research Department

Abstract: 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)
Date: 2003
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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