Capital Supply Uncertainty, Cash Holdings, and Investment
Julien N. Hugonnier
Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute; Swiss Finance Institute
Swiss Finance Institute; Ecole Polytechnique Fédérale de Lausanne
September 7, 2011
Swiss Finance Institute Research Paper No. 11-44
We develop a model of investment, payout, and financing policies in which firms face uncertainty regarding their ability to raise funds and have to search for investors when in need of capital. We show that capital supply uncertainty leads firms to value financial slack and to adjust their policies to the level of their cash reserves, notably when choosing between retention and payout, between internal or external financing of investment, and between speculation and hedging. In the model, investment and payout do not always increase with slack for constrained firms and the choice between internal and external funds does not follow a strict pecking order. In addition, the use of inside and outside cash are related to a number of firm characteristics, such as asset tangibility, cash flow volatility, access to capital markets, or agency costs.
Number of Pages in PDF File: 101
Keywords: Capital supply uncertainty, cash holdings, real investment, search
JEL Classification: D83, G24, G31, G33, G35working papers series
Date posted: August 15, 2010 ; Last revised: October 9, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.812 seconds