Investment timing, reversibility, and financing constraints

This paper examines the optimal financing and investment decisions problem of a firm that is constrained by an upper limit of debt issuance based on liquidation (collateral) value. Our model provides five new results. First, an upper limit of debt issuance does not always delay corporate investment....

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Bibliographic Details
Published inJournal of corporate finance (Amsterdam, Netherlands) Vol. 48; pp. 771 - 796
Main Authors Shibata, Takashi, Nishihara, Michi
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.02.2018
Subjects
Capital structure
Collateral
Investment quantity
Liquidation value
Real options
G33
G32
G13
Investment quantity
Liquidation value
Collateral
Real options
Capital structure
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Summary:This paper examines the optimal financing and investment decisions problem of a firm that is constrained by an upper limit of debt issuance based on liquidation (collateral) value. Our model provides five new results. First, an upper limit of debt issuance does not always delay corporate investment. Second, an upper limit does not affect the determination of investment quantity. Third, an upper limit may change bankruptcy strategies during financial distress via a change of capital structure. Fourth, an upper limit may induce the debt to move from risky to riskless. Fifth, an upper limit always decreases the leverage, credit spread, and default probability.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2017.12.024