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Investment Frictions versus Financing Frictions

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  • Takao Kobayashi

    (Faculty of Economics, University of Tokyo)

  • Risa Sai

    (Graduate School of Economics, University of Tokyo)

Abstract

Bertola/Caballero (1994) and Abel/Eberly (1996) extended Jor-genson's classical model of firms'optimal investment. By introducing investment frictions, they were able to capture the role of future antic-ipations in investment decisions as well as the lumpy and intermittent nature of investment dynamics. We extend Jorgenson's model to the other direction of financing frictions. We construct a model of an equity-only firm, who must pay a linear financing cost for issuing new shares. We show that the firm's optimal investment-financing is a two-trigger policy in which the firm finances investment by issuing new shares (supplementing internal funds) when the shadow price of capital hits the upper trigger value. When the shadow price hits the lower trigger value, she sells a portion of her capital stock and buys back shares (or pays dividends). Values of the shadow price of capital between the two trigger values define a range of "inaction", in which the firm does neither issue nor buy back shares and invests all of her internal funds for expansion.

Suggested Citation

  • Takao Kobayashi & Risa Sai, 2009. "Investment Frictions versus Financing Frictions," CARF F-Series CARF-F-153, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf153
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/158.pdf
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    References listed on IDEAS

    as
    1. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
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    9. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
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