Corporate Financial and Investment Policies when Future Financing is not Frictionless

Heitor Almeida, Murillo Campello, Michael S. Weisbach

NBER Working Paper No. 12773
Issued in December 2006
NBER Program(s):Corporate Finance

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.

download in pdf format
   (293 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12773

Published: Almeida, Heitor, Murillo Campello, and Michael S. Weisbach. "Corporate Financial and Investment Policies when Future Financing is not Frictionless." Journal of Corporate Finance 17, 3 (June 2011): 675-693. citation courtesy of

Users who downloaded this paper also downloaded* these:
Myers and Majluf w1396 Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have
Bolton, Chen, and Wang w14845 A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management
Fazzari, Hubbard, and Petersen w2387 Financing Constraints and Corporate Investment
Almeida and Campello w12087 Financial Constraints, Asset Tangibility, and Corporate Investment
Acharya, Almeida, and Campello w11391 Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us