Corporate Financial And Investment Policies When Future Financing Is Not Frictionless

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Executive Summary

The paper studies a model in which future financing constraints lead firms to have a preference for investments with shorter payback periods, investments with less risk, and investments that utilize more pledgeable assets. The model also shows how investments distortions towards more liquid, safer assets vary with the marginal cost of external financing and with firm internal cash flows. The theory helps reconcile and interpret a number of patterns reported in the empirical literature, in areas such as risk-taking behavior, capital structure choices, hedging strategies, and cash management policies.

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