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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Review of Financial Economics, Volume 17, Issue 2, 2008, Pages 112–129
According to standard investment theory, the current investments of more financially constrained firms should be smaller than those of less constrained firms with similar investment opportunities. In this paper, I develop a dynamic investment model in which the project value and the severity of financing constraints can vary over time. My results contradict standard theory. To preempt further financing risk in the future, severely constrained firms may engage in more active investment behavior even if they face relatively high additional financing costs at the time. My numerical example demonstrates that a relatively low probability of future risk is sufficient to cause such preemptive behavior.
In a frictionless financial market, funds flow efficiently to firms with profitable investment opportunities. This proposition implies that in such an ideal financial market, firms with the same investment opportunities can undertake the same number of investment projects and on average will grow at the same rate. However, in actual financial markets, some serious imperfections, such as informational asymmetries and contractual incompleteness, can arise. Recent investment theories argue that, given such imperfections, the current investments of firms could be constrained by firm-specific financial variables or characteristics other than their investment opportunities that would be irrelevant in a world of perfect and complete financial markets (e.g., Bernanke and Gertler, 1989, Fazzari et al., 1988, Kiyotaki and Moore, 1997 and Tirole, 2005). 1 According to recent standard investment theories, therefore, if there are serious imperfections in the financial markets and they face different degrees of financing constraints, then even two firms with the same investment opportunities do not necessarily grow at the same rate. Rather, because of its poorer financial status, the current investment level of a more constrained firm is expected to be invariably lower than that of a less constrained one. More generally, standard investment theory predicts that depending on the severity of their financing constraints, there is a monotonic ordering of firms' investment levels. Such a theoretical prediction seems entirely plausible, because in general, the more severely a firm is financially constrained (either in the form of credit availability constraints or in the form of additional financing costs), the fewer are the states in which the firm is willing or able to invest.2 The purpose of this paper is to reexamine the theoretical robustness of the monotonic order hypothesis in standard investment theory. In particular, I examine whether it is conceivable for a more severely constrained firm to grow faster (i.e., invest more or earlier) than a less constrained one; I also consider under what, if any, condition such a possibility may arise. For this purpose, I develop a dynamic investment model in which differently constrained firms determine when to undertake irreversible investment projects while at the same time considering their current and future financial status. In this model, I allow not only the project value, but also the severity of firms' financing constraints, to vary over time. Through model analysis and by developing a numerical example, in this paper, I show that it is possible that more severely constrained firms decide to undertake a risky investment project earlier than do less constrained firms with similar investment opportunities. To examine the possibility of a nonmonotonic ordering of investments, I consider the investment behavior of three different types of firm: a financially unconstrained firm (UC firm); a financially constrained firm (C firm); and a severely constrained firm (SC firm). The UC firm in my model is defined as a firm that is not affected by financial market imperfections. The C firm and the SC firm do experience financial market imperfection problems. Both C and SC types of firm have insufficient internal funds of their own and thus incur additional costs of raising external funds. The main difference between the C firm and the SC firm relates to the stability of their financial status: the SC firm not only experiences current higher financing costs, but it also faces the risk of not being able to obtain financing in the future; by contrast, the C firm does not face such a risk. I assume that once such a no-financing constraint occurs, the investment financing costs of the SC firm jump so significantly, becoming virtually infinite, that the firm can no longer implement its investment project. By deriving and comparing firms' optimal investment policies (i.e., their optimal investment timing), I show that there is the possibility of a nonmonotonic ordering. In my model, the C firm, which only experiences cost constraints, invests later than the UC firm. However, the SC firm, which faces both cost and no-financing constraints, may invest earlier than the UC firm. This result arises from the preemptive incentive of the SC firm: to preempt further financing risk in the future, the SC firm may engage in more active investment behavior even if it faces relatively high additional financing costs at that time. In my numerical example, a relatively low probability is sufficient to induce such a preemptive investment policy, and thereby, cause a nonmonotonic ordering of investments. In their dynamic investment model, Boyle and Guthrie (2003) also analyze the optimal investment timing of differently constrained firms and demonstrate that it is possible that a more constrained firm facing the threat of future funding shortfalls invests earlier than an unconstrained firm.3 The main difference between my model and theirs is the form of the financing constraints incorporated in the model. The financially constrained firms in my model potentially face both higher financing costs and credit-availability constraints, whereas the constrained firms in Boyle and Guthrie (2003) face only quantity constraints. I show that even if a higher-cost constraint is incorporated, a nonmonotonic ordering of investments may arise.4 In extending the model analysis, I also provide empirical implications for the lively debate over firms' investment–cash flow sensitivities. In particular, I show that a group of financially more constrained firms may have either positive or negative investment–cash flow sensitivities, depending on what type of firm is predominant in the estimating sample of financially constrained firms. The paper is organized as follows. In Section 2, I provide the basic framework of the model. In Section 3, the optimal investment policy of each type of firm is investigated. Section 4 presents a comparative analysis and a numerical example. In Section 5, I discuss the empirical implications of the analysis. Section 6 concludes the paper.
نتیجه گیری انگلیسی
In standard investment theories, a monotonic ordering of investments is predicted for differently constrained firms with similar investment opportunities. In this paper, I reexamine the robustness of this hypothesis. I do so by presenting a dynamic investment model in which differently constrained firms determine when to undertake their irreversible investment projects at the same time as considering their current and future financial status. Through model analysis and by using a numerical example, I show that more financially constrained firms can exhibit more active investment behavior even if they face considerably higher investment costs. I emphasize the impact of future financing risks on firms' current investments. When financially constrained firms face further financing risks in the future, particularly in the form of no-financing constraints, they may engage in more active investment behavior at that time to preempt such future risks. In my numerical example, a relatively low probability of future risk is sufficient to generate such a preemptive investment policy, and therefore, a nonmonotonic ordering of investments. In extending the model analysis, I also provide empirical implications for the ongoing debate about firms' investment–cash flow sensitivities. In particular, I show that a group of financially more constrained firms can have either positive or negative investment–cash flow sensitivities. According to my analysis, whether positive or negative sensitivity arises depends on what type of firm is predominant in the estimating sample of financially constrained firms. To understand and clarify the comprehensive effects of financial market imperfections on firms' investment behavior, what needs to be considered and appropriately modeled is not only the influence of current financing constraints, but also the influence of potential financing risks in the future.