Abstract: We model the relationship between a firm’s growth opportunities and its financing policy. Financially constrained firms have an incentive to maintain reserve borrowing capacity when expected future investment opportunities are high. These strategic savings allow firms to respond optimally to new opportunities when there are frictions on equity financing. The incentive for saving decreases with the cost of borrowing, and thus shifts in monetary policy can have a stronger impact on the financing of high growth firms. We show that, based on differences in growth opportunities alone, the model can explain differences in financing and performance we document between high and low growth IT firms during the Dot-Com boom and its subsequent bust.
Publication Year: 2010
Publication Date: 2010-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 1
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