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Capital Supply Uncertainty, Cash Holdings, and Investment

Author

Listed:
  • Julien HUGONNIER

    (EPFL and Swiss Finance Instiute)

  • Semyon MALAMUD

    (EPFL and Swiss Finance Instiute)

  • Erwan MORELLEC

    (EPFL, Swiss Finance Instiute, and CEPR)

Abstract

We develop a model of investment, payout, and nancing policies in which rms face uncertainty regarding their ability to raise funds and have to search for investors when in need of capital. We show that capital supply uncertainty leads rms to value nancial slack and to adjust their policies to the level of their cash reserves, notably when choosing between retention and payout, between internal or external nancing of investment, and between speculation and hedging. In the model, investment and payout do not always increase with slack for constrained rms and the choice between internal and external funds does not follow a strict pecking order. In addition, the use of inside and outside cash are related to a number of rm characteristics, such as asset tangibility, cash ow volatility, access to capital markets, or agency costs.

Suggested Citation

  • Julien HUGONNIER & Semyon MALAMUD & Erwan MORELLEC, 2011. "Capital Supply Uncertainty, Cash Holdings, and Investment," Swiss Finance Institute Research Paper Series 11-44, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1144
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    Keywords

    Capital supply uncertainty; cash holdings; real investment; search;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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