Abstract
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 language | English |
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| Pages (from-to) | 21-45 |
| Journal | De Economist |
| Volume | 152 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 1 Jan 2004 |