Journal
JOURNAL OF FINANCE
Volume 63, Issue 5, Pages 2263-2296Publisher
BLACKWELL PUBLISHING
DOI: 10.1111/j.1540-6261.2008.01397.x
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We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity.
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