By postulating a simple stochastic process for the firm’s cash flows in which the drift and the variance of the process depend on the investment policy of the firm, we develop a theoretical model, determine the optimal investment policy and, given this policy, calculate the ratio of the current value of the firm and the current cash flow which we call the “cash flow multiplier”. The main contri...

This paper examines the effects of costly external financing on the optimal timing of a firm’s investment. By altering the optimal investment timing, costly financing affects current investment and the sensitivity of investment to internal cash flow. Importantly, the relation between the cost of external funds and investment-cash flow sensitivity is non-monotonic. Investment-cash flow sensitivi...

We consider the optimal contract between an entrepreneur and investors in a single-period model when both parties have limited liability, are risk-neutral toward cash flow risk, and are ambiguity-averse. Ambiguity aversion is modeled by multiplier preferences for robustness toward model uncertainty, as in Hansen and Sargent (2001). Efficient ambiguity-sharing implies that the first-best contrac...

We outline a simple model in which optimizing firms choose corporate investment, external financing, and cash holding decisions simultaneously. The model generates predictions for the responsiveness of the above three corporate financial decisions to cash flow shocks and firm misvaluation, as well as new predictions for the crosseffects of misvaluation on the cash flow sensitivities of these co...

Two separate strands of the literature on capital structure under asymmetric information consider the relationship between a firm's financial leverage and cash flow. Signalling theory suggests a positive relationship, while pecking order behavior implies a negative relationship. These contrasting theoretical implications appear contradictory. However, both are supported in different bodies of e...

In view of the allocation of cash flow rights and control rights in venture capital firms, a financing contract model is set up by introducing the entrepreneur’s self-owned capital in this paper. This paper analyzes the affecting factors and mechanism to the allocation of cash flow rights and control rights, shows the relationship between cash flow rights and control rights, gives the bargain i...