Investment Timing when External Financing is Costly

This paper analyzes the investment timing of firms facing two dimensions of financingconstraints: Liquidity constraints and capital market frictions inducing financing costs. We showthat liquidity constraints are not sufficient to explain voluntary investment delay. However, whenadditionally considering financing costs, we can explain both voluntary delay and accelerationof investment. More precisely, we find that investment thresholds are U-shaped in liquid funds.For high-liquidity firms, investment thresholds are decreasing (i.e., accelerated investmenttakes place) in either dimension of financing constraint. In contrast, investment thresholdsare increasing (i.e., investment is further delayed) in either form of financing constraint forlow-liquidity firms. For intermediate levels of liquidity, investment thresholds are U-shaped inmarket frictions.[...]