The Non-Monotonic Effect Of Financing Constraints On Investment

The authors analyze investment timing in a discrete-time framework with two possible investment dates, which is an extension of the model by Lyandres (2007). They derive an investment threshold that is U-shaped in the firm's liquid funds, a result similar to the in finite-horizon models by Boyle and Guthrie (2003) and Hirth and Uhrig-Homburg (2007). However, due to the tractability of their model, they can more clearly explain the relevant trade-offs leading to the U-shape: the firm balances financing costs and abandonment risk for present and future investment, respectively.