Dynamic Investment and Financing with Internal and External Liquidity Management

We develop a theoretical model of dynamic investments, dividend payouts, debt borrowing, external equity financing/bankruptcy, and risk management for financially constrained firms. The model characterizes the central... [ view full abstract ]

We develop a theoretical model of dynamic investments, dividend payouts, debt borrowing, external equity financing/bankruptcy, and risk management for financially constrained firms. The model characterizes the central importance of liquidity management in corporate decision making in the presence of external financing costs. Mathematically, we solve the model by simultaneously employing the variational inequality approach for the equity value and the fixed-point approach for the debt value, which is new to the literature. The solution produces several interesting implications in corporate finance.