Investments and Finance when Liquidation is costly

W.A. Letterie, A. Bruinshoofd*

*Corresponding author for this work

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In this paper we investigate to what extent expected liquidation costs affect the dependence of a firm's investment decision on available finance. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs has additional explanatory power over other proxies for the premium on external finance – like leverage, retention practice and firm size.
Original languageEnglish
Pages (from-to)21-45
JournalDe Economist
Issue number1
Publication statusPublished - 1 Jan 2004

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