Dynamic investment in new technology and risk management

In this paper, we incorporate new technology investment into a dynamic Q-theoretic framework where firms face financing constraints, and examine the interactions among investments in new technology and capital, and risk management, including cash management and financial hedging. Our model provides several important results. First, we find that financing constraints reduce investment in new technology. Second, firms with new technology adoption postpone payouts, scale up external financing, increase investment in capital and strengthen incentives for financial hedging relative to the scenario without new technology adoption. Additionally, the impact of new technology adoption on asset sales depends on whether costly refinancing is available. Finally, investment in new technology decreases with risk when cash reserves are abundant, and the relation between investment in new technology and risk depends on whether costly refinancing is available when running out of cash. In addition, we also find that financial hedging increases investment in new technology.