We study how interactions between financing and investment decisions can shape firm boundaries in innovative markets. In particular, we model innovative projects as growth options and ask whether they are best operated inside large incumbent firms (Integration) or in separate, specialized firms (Non-Integration). Starting from a standard theoretical framework, in which value-maximizing corporat...

This paper empirically examines whether additional future fixed capital and R&D investment expenditures induce firms to accumulate cash reserves while considering the role of market imperfections. Implementing a dynamic framework on a panel of US, UK and German companies, we find that firms make larger additions to cash holdings when they plan additional future R&D rather than fixed capital inv...

Option models have provided insight into the value of flexibility to switch from one state to another (such as switching a mine or refinery from operating to closed status). More complex flexible processes offer multiple possibilities for switching states. A fabrication facility, for example, may offer options to shift from the current status to any of several alternatives (reflecting reconfigu...

We study whether firms spread out debt maturity dates, which we call “granularity of corporate debt.” In our model, firms that are unable to roll over expiring debt need to liquidate assets. If multiple small asset sales are less inefficient than a single large one, it can be optimal to diversify debt rollovers across time. Using a large sample of corporate bond issuers during the 1991–2012 per...

Fernandez (2004b) argues that the present value effect of the tax saving on debt cannot be calculated as simply the present value of the tax shields associated with interest. This contradicts standard results in the literature. It implies that, even though the capital market is complete, value-additivity is violated. As a consequence, adjusted present value formulae of a standard sort cannot be...

Is investment cash-flow sensitivity affected by a country’s capital market imperfection? We take 42 countries as our sample and collect six imperfect capital market measures (ICAM), ie., the stock market capitalization ratio, number of publicly-listed firm, stock turnover ratio, bank loan ratio, long-term debt ratio and the interest spread. Using a two-step approach, negative relationships betw...

Article history: Received 4 July 2009 Received in revised form 26 May 2012 Accepted 3 August 2012 Available online 5 October 2012 Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of eme...

Using variations in local real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on cash policies of US firms. Building on this natural experiment, we find strong evidence that increases in real estate values lead to smaller corporate cash reserves, declines in the marginal value of cash holdings, and lower cash flow se...

Real world investment decisions are generally made sequentially over time. The possibility of subsequent decisions like suspending a project must be considered when an initial investment decision is made. This seems to be particularly important in the case of investments, which take a long 'time to build'. This paper analyzes the impact of lags between the initial investment decision and the co...

Enterprise Risk Management (ERM) is a process that manages all risks in an integrated, holistic fashion by controlling and coordinating offsetting risks across the enterprise. This research investigates whether the adoption of the ERM approach affects firms’ cost of equity capital. We restrict our analysis to the U.S. insurance industry to control for unobservable differences in business models...