721 - Investment and Financing Decisions when Liquidation is Costly

Wetenschappelijke publicatie
Date 1 January 2003

In this paper we investigate how expected liquidation costs affect a firm’s investment and financing decisions. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large Dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs does not convey the same information that other proxies for the premium on external finance – like leverage, retention practice or firm size – already contain. Key words: Investment policy, financing policy, liquidation cost, sales comovement JEL codes: G31, G33