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Optimal Investment by Financially Xenophobic Managers

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Abstract

Case studies show that corporate managers seek financial independence to avoid interference by outside financiers. We incorporate this financial xenophobia as a fixed cost in a simple dynamic model of financing and investment. To avoid refinancing in the future, the firm alters its behavior depending on the extent of its financial xenophobia and the realization of a revenue shock. With a sufficiently adverse shock, the firm holds no liquidity. Otherwise, the firm precautionarily saves and holds both liquidity and external finance. Investment always responds to neoclassical fundamentals, but responds to cash flow only when the firm holds no liquidity.

Suggested Citation

  • Jason G. Cummins & Ingmar Nyman, 2000. "Optimal Investment by Financially Xenophobic Managers," Economics Working Paper Archive at Hunter College 02/4, Hunter College Department of Economics, revised 2001.
    • Handle: RePEc:htr:hcecon:02/4
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    File URL: http://econ.hunter.cuny.edu/wp-content/uploads/sites/6/RePEc/papers/HunterEconWP02-4.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment; Corporate Cash Holdings; Liquidity; Cash Flow;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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