Investment, Uncertainty, and Liquidity

25 Pages Posted: 13 Jan 2002

See all articles by Glenn Boyle

Glenn Boyle

University of Canterbury - Economics and Finance; Sapere Research Group

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

Abstract

We analyze the investment timing problem of a firm subject to a financing constraint. The threat of future funding shortfalls encourages the firm to accelerate investment beyond the level that is first-best optimal. Thus, our model highlights a new way by which costly external financing can distort investment behavior. Moreover, hedging is useful not only because it allows investment to proceed, but also because it allows investment to be delayed. These results can potentially help explain observed empirical relationships between investment and liquidity, investment and uncertainty, investment and hedging, and shareholder wealth and volatility.

Keywords: Investment timing, financing constraint, hedging, liquidity

JEL Classification: G31

Suggested Citation

Boyle, Glenn and Guthrie, Graeme, Investment, Uncertainty, and Liquidity (December 2001). Available at SSRN: https://ssrn.com/abstract=296461 or http://dx.doi.org/10.2139/ssrn.296461

Glenn Boyle

University of Canterbury - Economics and Finance ( email )

Private Bag 4800
Christchurch
New Zealand

Sapere Research Group ( email )

Level 9, Pencarrow House
1 Willeston St
Wellington, 6140
New Zealand

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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