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UBC Theses and Dissertations
Financing investment with external funds Moyen, Nathalie
Abstract
This thesis presents various dynamic models of corporate decisions to address two main issues: investment distortions caused by debt financing and cash flow sensitivities. In the first chapter, four measures of investment distortion are computed. First, the effect of financing frictions is examined. The tax benefit of debt induces firms to increase their debt capacity and to invest beyond the first-best level on average. The cost of this investment distortion outweighs the tax benefit of debt. Second, Myers's (1977) debt overhang problem is examined in a dynamic framework. Debt overhang obtains on average, but not in low technology states. Third, there is no debt overhang problem in all technology states when debt is optimally put in place prior to the investment decision. Finally, the cost of choosing investment after the debt policy is examined. Equity claimants lose value by choosing to invest after their debt is optimally put in place because they do not consider the interaction between their investment choice and the debt financing conditions. The second chapter explores the impact of financial constraints on firms' cash flow sensitivities. In contrast to Fazzari, Hubbard, and Petersen (1988), cash flow sensitivities are found to be larger, rather than smaller, for unconstrained firms than for constrained firms. Then, why is investment sensitive to cash flow? In the two models examined in the second chapter, the underlying source of investment opportunities is highly correlated with cash flows. Investment may be sensitive to cash flow fluctuations simply because cash flows proxy for investment opportunities. This leaves two important questions. Can this chapter suggest a better measure of investment opportunities than Tobin's Q? Not a single measure for both the unconstrained and constrained firm models. Can this chapter suggest an easily observable measure of financial constraint? Yes: large and volatile dividend-to-income ratios.
Item Metadata
Title |
Financing investment with external funds
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Creator | |
Publisher |
University of British Columbia
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Date Issued |
1999
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Description |
This thesis presents various dynamic models of corporate decisions
to address two main issues: investment distortions caused by debt
financing and cash flow sensitivities.
In the first chapter, four measures of investment distortion are computed.
First, the effect of financing frictions is examined. The tax
benefit of debt induces firms to increase their debt capacity and to invest
beyond the first-best level on average. The cost of this investment
distortion outweighs the tax benefit of debt. Second, Myers's (1977)
debt overhang problem is examined in a dynamic framework. Debt
overhang obtains on average, but not in low technology states. Third,
there is no debt overhang problem in all technology states when debt
is optimally put in place prior to the investment decision. Finally, the
cost of choosing investment after the debt policy is examined. Equity
claimants lose value by choosing to invest after their debt is optimally
put in place because they do not consider the interaction between their
investment choice and the debt financing conditions.
The second chapter explores the impact of financial constraints on
firms' cash flow sensitivities. In contrast to Fazzari, Hubbard, and Petersen
(1988), cash flow sensitivities are found to be larger, rather than
smaller, for unconstrained firms than for constrained firms. Then, why
is investment sensitive to cash flow? In the two models examined in
the second chapter, the underlying source of investment opportunities
is highly correlated with cash flows. Investment may be sensitive to
cash flow fluctuations simply because cash flows proxy for investment
opportunities. This leaves two important questions. Can this chapter
suggest a better measure of investment opportunities than Tobin's
Q? Not a single measure for both the unconstrained and constrained
firm models. Can this chapter suggest an easily observable measure of
financial constraint? Yes: large and volatile dividend-to-income ratios.
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Extent |
3074887 bytes
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Genre | |
Type | |
File Format |
application/pdf
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Language |
eng
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Date Available |
2009-07-03
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Provider |
Vancouver : University of British Columbia Library
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Rights |
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
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DOI |
10.14288/1.0099413
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URI | |
Degree | |
Program | |
Affiliation | |
Degree Grantor |
University of British Columbia
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Graduation Date |
1999-11
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Campus | |
Scholarly Level |
Graduate
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Aggregated Source Repository |
DSpace
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Item Media
Item Citations and Data
Rights
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.