Investment and dividends under irreversibility and financial constraints

✍ Scribed by Richard W.P. Holt

• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 342 KB
• Volume: 27
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(01)00057-4

✦ Synopsis

Research ÿnds that ÿrms' investment and dividend policies are distorted by irreversibility and ÿnance constraints. Existing work considers the impact of each such friction in isolation. Using a real options framework, I explain how the investment and payout decisions interact over time when irreversibility and ÿnancial constraints may bind jointly. Firms' behaviour follows a life-cycle pattern: young (small) ÿrms invest for growth; not unless they avoid liquidation and expand through investment do they pay dividends. Important ramiÿcations for empirical work on investment are discussed.