2014
DOI: 10.1080/17509653.2014.937836
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Investment timing with fixed and proportional costs of external financing

Abstract: We develop a dynamic model in which a firm exercises an option to expand production with a cash balance and costly external funds. By proving the properties of the option exercise regions, we reveal how the firm's financing and investment policy depends on its cash flow and balance. In the presence of only 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-monotonic relation between the investment… Show more

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Cited by 2 publications
(7 citation statements)
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“…When I 2 /I 1 (or (A 1 −1)/(A 2 −1)) is sufficiently low, i.e., in the first column, the financing and investment policy is the same as that of the case with only the large-scale project (fixed-scale investment model). This case is studied in details by Nishihara and Shibata (2011), and, hence, we omit the explanation. The second and third columns present more interesting panels, in which the firm optimizes the investment size as well as investment timing.…”
Section: Empirical Implicationsmentioning
confidence: 99%
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“…When I 2 /I 1 (or (A 1 −1)/(A 2 −1)) is sufficiently low, i.e., in the first column, the financing and investment policy is the same as that of the case with only the large-scale project (fixed-scale investment model). This case is studied in details by Nishihara and Shibata (2011), and, hence, we omit the explanation. The second and third columns present more interesting panels, in which the firm optimizes the investment size as well as investment timing.…”
Section: Empirical Implicationsmentioning
confidence: 99%
“…Recall 5 The term r(1 + C)I 2 dt is negligible when X(t) is high. 6 In all figures in this paper, we set the axes in the same way as Boyle and Guthrie ( 2003), Hirth and Uhrig-Homburg (2010b), and Nishihara and Shibata (2011) for comparison. This figure illustrates the cases in which…”
Section: Empirical Implicationsmentioning
confidence: 99%
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