Optimal Investment by Financially Xenophobic Managers

32 Pages Posted: 4 Nov 2001

See all articles by Jason G. Cummins

Jason G. Cummins

Brevan Howard Asset Management LLP

Ingmar Nyman

City University of New York, CUNY Hunter College - Department of Economics

Date Written: November 19, 2001

Abstract

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

Cummins, Jason Gustav and Nyman, Ingmar, Optimal Investment by Financially Xenophobic Managers (November 19, 2001). FEDS Working Paper No. 2001-40. Available at SSRN: https://ssrn.com/abstract=288557 or http://dx.doi.org/10.2139/ssrn.288557

Jason Gustav Cummins (Contact Author)

Brevan Howard Asset Management LLP ( email )

London, SW1Y 6XA
United Kingdom

Ingmar Nyman

City University of New York, CUNY Hunter College - Department of Economics ( email )

695 Park Avenue
New York, NY 10021
United States

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