Capital Supply Uncertainty, Cash Holdings, andInvestment

We develop a model of real investment and cash holdings in which firms face uncertaintyregarding their ability to raise funds in the capital markets and have to search for investorswhen raising outside capital. We provide an explicit characterization of the optimal investment,cash management, and dividend policies for a firm acting in the best interests of incumbentshareholders and show that capital market supply frictions have first-order effects on corporatebehavior. We then use the model to explain a key set of stylized facts in corporate financeand to generate a number of novel testable implications relating the supply of funds in capitalmarkets to corporate policy choices.[...]