Bertola/Caballero (1994) and Abel/Eberly (1996) extended Jor-
genson.s classical model of .rms.optimal investment. By introducing
investment frictions, they were able to capture the role of future antic-
ipations in investment decisions as well as the lumpy and intermittent
nature of investment dynamics. We extend Jorgenson.s model to the
other direction of .nancing frictions. We construct a model of an
equity-only .rm, who must pay a linear .nancing cost for issuing new
shares. We show that the .rm.s optimal investment-.nancing is a
two-trigger policy in which the .rm .nances investment by issuing
new shares (supplementing internal funds) when the shadow price of
capital hits the upper trigger value. When the shadow price hits the
lower trigger value, she sells a portion of her capital stock and buys
back shares (or pays dividends). Values of the shadow price of capital
between the two trigger values de.ne a range of "inaction", in which
the .rm does neither issue nor buy back shares and invests all of her
internal funds for expansion.
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