Keywords: Financial xenophobia, investment, corporate cash holdings
Abstract: Case studies show that corporate managers seek financial independence
to avoid interference by outside financiers. We incorporate this
financial xenophobia as a fixed cost in a simple dynamic model of
financing and investment. To avoid refinancing in the future, the
firm alters its behavior depending on the extent of its financial
xenophobia and the realization of a revenue shock. With a
sufficiently adverse shock, the firm holds no liquidity. Otherwise,
the firm precautionarily saves and holds both liquidity and external
finance. Investment always responds to neoclassical fundamentals, but
responds to cash flow only when the firm holds no liquidity.
Full paper (292 KB PDF)
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Last update: September 8, 2004