Nishihara, Michi

Shibata, Takashi

We develop a dynamic model in which a firm exercises an option to expand productionwith cash balance and costly external funds. While related papers explain their resultsonly by numerical examples, we analytically prove the following results. In the presence ofonly a proportional cost of external financing, the firm with more cash balance invests earlier;however, the presence of both proportional and fixed costs leads to a non-monotonicrelation between the investment time and cash balance. The firm with more cash balanceinvests later to save a fixed cost, particularly when the cash balance is close to theinvestment cost. Our results can potentially account for a variety of empirical resultsconcerning the relation between investment volume and financing constraints

Osaka University Knowledge Archive

Investment timing with fixed and proportional costs of external fnancing

http://www2.econ.osaka-u.ac.jp/library/global/dp/1129.pdf

Investment timing with fixed and proportional costs of external fnancing

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Osaka University Knowledge Archive