Growth and Strategic Savings

39 Pages Posted: 23 Aug 2010 Last revised: 17 Dec 2010

See all articles by Nathaniel Arnold

Nathaniel Arnold

University of Southern California; International Monetary Fund (IMF)

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Date Written: August 22, 2010


We model the relationship between a firm’s growth opportunities and its financing policy. Financially constrained firms have an incentive to maintain reserve borrowing capacity when expected future investment opportunities are high. These strategic savings allow firms to respond optimally to new opportunities when there are frictions on equity financing. The incentive for saving decreases with the cost of borrowing, and thus shifts in monetary policy can have a stronger impact on the financing of high growth firms. We show that, based on differences in growth opportunities alone, the model can explain differences in financing and performance we document between high and low growth IT firms during the Dot-Com boom and its subsequent bust.

Keywords: Dot-Com, High Growth, Firm Financing, Debt Financing, Tobin's Q, Crash

JEL Classification: G1, G3, L6

Suggested Citation

Arnold, Nathaniel and Dagher, Jihad C., Growth and Strategic Savings (August 22, 2010). Available at SSRN: or

Nathaniel Arnold

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jihad C. Dagher (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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