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Capital Supply Uncertainty, Cash Holdings, and Investment


Julien N. Hugonnier


Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Semyon Malamud


Ecole Polytechnique Federale de Lausanne; Swiss Finance Institute

Erwan Morellec


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

May 22, 2013

Swiss Finance Institute Research Paper No. 11-44

Abstract:     
We develop a model of investment, financing, and cash management decisions in which investment is lumpy and firms face uncertainty regarding their ability to raise funds in the capital markets. We characterize optimal policies explicitly and show that the smooth-pasting conditions used in prior contributions are necessary, but may not be sufficient, for an optimum. Instead of the standard Miller and Orr (1966) double-barrier policy for financing and payout, firms may optimally raise outside funds before exhausting internal resources and the optimal payout policy may feature several regions, with both smooth and discrete dividend payments. In the model, firms with high investment costs are qualitatively as well as quantitatively different in their investment, financing, and payout behaviors from firms with low investment costs. Finally, investment and payout do not always increase with slack, challenging the use of investment-cash flow sensitivities or payout ratios as measures of financing constraints.

Number of Pages in PDF File: 52

Keywords: Capital supply uncertainty, cash management, lumpy investment, inventory models

JEL Classification: D83, G24, G31, G33, G35

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Date posted: August 15, 2010 ; Last revised: May 22, 2013

Suggested Citation

Hugonnier, Julien N. and Malamud, Semyon and Morellec, Erwan, Capital Supply Uncertainty, Cash Holdings, and Investment (May 22, 2013). Swiss Finance Institute Research Paper No. 11-44. Available at SSRN: http://ssrn.com/abstract=1658362 or http://dx.doi.org/10.2139/ssrn.1658362

Contact Information

Julien N. Hugonnier
Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Semyon Malamud
Ecole Polytechnique Federale de Lausanne ( email )
Lausanne, 1015
Switzerland
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Erwan Morellec (Contact Author)
Ecole Polytechnique Fédérale de Lausanne ( email )
College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland
HOME PAGE: http://sfi.epfl.ch/
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
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