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http://ssrn.com/abstract=676630
 
 

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Investment Timing When External Financing is Costly


Stefan Hirth


University of Aarhus

Marliese Uhrig-Homburg


Karlsruhe Institute of Technology (KIT) - Financial Engineering and Derivatives Department

February 1, 2010

Journal of Business Finance & Accounting, Vol. 37, Issue 7-8, pp. 929-949, September/October 2010

Abstract:     
This paper analyzes the investment timing of firms facing two dimensions of financing constraints: Liquidity constraints and capital market frictions inducing financing costs. We show that liquidity constraints are not sufficient to explain voluntary investment delay. However, when additionally considering financing costs, we can explain both voluntary delay and acceleration of investment. More precisely, we find that investment thresholds are U-shaped in liquid funds. For high-liquidity firms, investment thresholds are decreasing (i.e. accelerated investment takes place) in either dimension of financing constraint. In contrast, investment thresholds are increasing (i.e. investment is further delayed) in either form of financing constraint for low-liquidity firms. For intermediate levels of liquidity, investment thresholds are U-shaped in market frictions.

Keywords: investment timing, underinvestment, overinvestment, real option valuation, costly external financing

JEL Classification: G31, G32

Accepted Paper Series





Not Available For Download

Date posted: March 6, 2005 ; Last revised: August 18, 2014

Suggested Citation

Hirth, Stefan and Uhrig-Homburg, Marliese, Investment Timing When External Financing is Costly (February 1, 2010). Journal of Business Finance & Accounting, Vol. 37, Issue 7-8, pp. 929-949, September/October 2010 . Available at SSRN: http://ssrn.com/abstract=676630

Contact Information

Stefan Hirth (Contact Author)
University of Aarhus ( email )
Nordre Ringgade 1
Aarhus, DK-8000
Denmark
Marliese Uhrig-Homburg
Karlsruhe Institute of Technology (KIT) - Financial Engineering and Derivatives Department ( email )
Postbox
D-76128 Karlsruhe, DE 76128
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)
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