Optimal investment with fixed refinancing costs

Jason Cummins () and Ingmar Nyman ()

No 2001-40, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Case studies show that corporate managers seek financial independence to avoid interference by outside financiers. We incorporate this financial xenophobia as a fixed cost in a simple dynamic model of financing and investment. To avoid refinancing in the future, the firm alters its behavior depending on the extent of its financial xenophobia and the realization of a revenue shock. With a sufficiently adverse shock, the firm holds no liquidity. Otherwise, the firm precautionarily saves and holds both liquidity and external finance. Investment always responds to neoclassical fundamentals, but responds to cash flow only when the firm holds no liquidity.

Keywords: Corporations - Finance; Financial institutions (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-pke
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Related works:
Journal Article: Optimal investment with fixed financing costs (2004)
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