The Non-Monotonic Effect of Financing Constraints on Investment

Stefan Hirth; Marc Viswanatha

Abstract

We analyze investment timing in a discrete-time framework with two possible investment dates, which is an extension of the model by Lyandres (2007). While Lyandres could only show non-monotonicity of investment in market frictions, we derive an investment threshold that is U-shaped in the firm's liquid funds, a result similar to the infinite-horizon model by Boyle and Guthrie (2003). However, due to the tractability of our model, we can more clearly explain the relevant trade-offs leading to the U-shape.

Original language	English
Publication date	2009
Publication status	Published - 2009
Event	23rd European Conference on Operational Research (EURO conference 2009) - Bonn, Germany Duration: 5 Jul 2009 → 8 Jul 2009

Conference

Conference	23rd European Conference on Operational Research (EURO conference 2009)
Country/Territory	Germany
City	Bonn
Period	05/07/2009 → 08/07/2009

Keywords

investment timing
liquidity
financing constraints

Access to Document

http://www.euro-2009.de/

Check availability with the Royal Danish Library

Cite this

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title = "The Non-Monotonic Effect of Financing Constraints on Investment",

abstract = "We analyze investment timing in a discrete-time framework with two possible investment dates, which is an extension of the model by Lyandres (2007). While Lyandres could only show non-monotonicity of investment in market frictions, we derive an investment threshold that is U-shaped in the firm's liquid funds, a result similar to the infinite-horizon model by Boyle and Guthrie (2003). However, due to the tractability of our model, we can more clearly explain the relevant trade-offs leading to the U-shape.",

keywords = "investment timing, liquidity, financing constraints",

author = "Stefan Hirth and Marc Viswanatha",

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T1 - The Non-Monotonic Effect of Financing Constraints on Investment

AU - Hirth, Stefan

AU - Viswanatha, Marc

PY - 2009

Y1 - 2009

N2 - We analyze investment timing in a discrete-time framework with two possible investment dates, which is an extension of the model by Lyandres (2007). While Lyandres could only show non-monotonicity of investment in market frictions, we derive an investment threshold that is U-shaped in the firm's liquid funds, a result similar to the infinite-horizon model by Boyle and Guthrie (2003). However, due to the tractability of our model, we can more clearly explain the relevant trade-offs leading to the U-shape.

AB - We analyze investment timing in a discrete-time framework with two possible investment dates, which is an extension of the model by Lyandres (2007). While Lyandres could only show non-monotonicity of investment in market frictions, we derive an investment threshold that is U-shaped in the firm's liquid funds, a result similar to the infinite-horizon model by Boyle and Guthrie (2003). However, due to the tractability of our model, we can more clearly explain the relevant trade-offs leading to the U-shape.

KW - investment timing

KW - liquidity

KW - financing constraints

M3 - Conference abstract for conference

T2 - 23rd European Conference on Operational Research (EURO conference 2009)

Y2 - 5 July 2009 through 8 July 2009

ER -