Journal
JOURNAL OF FINANCE
Volume 58, Issue 5, Pages 2143-2166Publisher
BLACKWELL PUBLISHERS
DOI: 10.1111/1540-6261.00600
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We analyze the dynamic investment decision of a firm subject to an endogenous financing constraint. The threat of future funding shortfalls lowers the value of the firm's timing options and encourages acceleration of investment beyond the first-best optimal level. As well as highlighting another way by which capital market frictions can distort investment behavior, this result implies that (1) the sensitivity of investment to cash flow can be greatest for high-liquidity firms and (2) greater uncertainty has an ambiguous effect on investment.
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