Optimal Investment by Financially Xenophobic Managers
32 Pages Posted: 4 Nov 2001
Date Written: November 19, 2001
Case studies show that corporate managers seek financial independence to avoid interference by outside financiers. We incorporate this financial xenophobia as a fixed cost in a simple dynamic model of financing and investment. To avoid refinancing in the future, the firm alters its behavior depending on the extent of its financial xenophobia and the realization of a revenue shock. With a sufficiently adverse shock, the firm holds no liquidity. Otherwise, the firm precautionarily saves and holds both liquidity and external finance. Investment always responds to neoclassical fundamentals, but responds to cash flow only when the firm holds no liquidity.
Keywords: Financial xenophobia, investment, corporate cash holdings
JEL Classification: D21, E22, G31
Suggested Citation: Suggested Citation