Capital Supply Uncertainty, Cash Holdings, and Investment

84 Pages Posted: 15 Aug 2010 Last revised: 7 May 2014

Julien Hugonnier

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

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne; Centre for Economic Policy Research (CEPR)

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Date Written: April 30, 2014

Abstract

We develop a dynamic model of investment, financing, and cash management decisions in which investment is lumpy and firms face capital supply uncertainty. We characterize optimal policies explicitly, demonstrate that smooth-pasting conditions may not guarantee optimality, and show that firms may not follow standard Miller and Orr (1966) barrier policies. In the model, firms with high investment costs differ in their behaviors from firms with low investment costs, financing policy does not follow a strict pecking order, and the optimal payout policy may feature several regions with both incremental and lumpy dividend payments.

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

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

Suggested Citation

Hugonnier, Julien and Malamud, Semyon and Morellec, Erwan, Capital Supply Uncertainty, Cash Holdings, and Investment (April 30, 2014). Swiss Finance Institute Research Paper No. 11-44. Available at SSRN: https://ssrn.com/abstract=1658362 or http://dx.doi.org/10.2139/ssrn.1658362

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( 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

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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/

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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