TY - JOUR AU - Almeida,Heitor AU - Campello,Murillo AU - Weisbach,Michael S. TI - Corporate Financial and Investment Policies when Future Financing is not Frictionless JF - National Bureau of Economic Research Working Paper Series VL - No. 12773 PY - 2006 Y2 - December 2006 UR - http://www.nber.org/papers/w12773 L1 - http://www.nber.org/papers/w12773.pdf N1 - Author contact info: Heitor Almeida University of Illinois at Urbana-Champaign 515 East Gregory Drive, 4037 BIF Champaign, IL, 61820 Tel: 217/333-2704 E-Mail: halmeida@illinois.edu Murillo Campello Johnson Graduate School of Management Cornell University 114 East Avenue 369 Sage Hall Ithaca, NY 148531-6201 Tel: 607-255-1282 E-Mail: campello@cornell.edu Michael Weisbach Department of Finance Fisher College of Business Ohio State University 2100 Neil Ave. Columbus, OH 43210 Tel: 614 292 3264 E-Mail: weisbach.2@osu.edu AB - Much of corporate finance is concerned with the impact of financing constraints on firms. However, the literature on financing constraints largely ignores the intertemporal implications of those constraints; in particular, how future financing constraints affect current investment decisions. We present a model in which future financing constraints lead firms to have a current preference for investments with shorter payback periods, investments with less risk, and investments that utilize more liquid/pledgeable assets. The model has a host of implications in different areas of corporate finance, including firms' capital budgeting rules, risk-taking behavior, capital structure choices, hedging strategies, and cash management policies. We show how a number of patterns reported in the empirical literature can be reconciled and interpreted in light of the intertemporal optimization problem firms solve when they face costly external financing. For example, contrary to Jensen and Meckling (1976), we show that firms may reduce rather than increase risk when leverage increases exogenously. Furthermore, firms in economies with less developed financial markets will not only take different quantities of investment, but will also take different kinds of investment (safer, short-term projects that are potentially less profitable). We also point out to several predictions that have not been empirically examined. For example, our model predicts that investment safety and liquidity are complementary: constrained firms are specially likely to distort the risk profile of their most liquid investments. ER -