Financing uncertain growth

Jay Y. Li and David C. Mauer

Journal of Corporate Finance, 2016, vol. 41, issue C, 241-261

Abstract: We examine interactions between investment and financing decisions in a dynamic model where the firm can alter the mix of debt and equity financing and exercise a randomly arriving and potentially short lived growth option. The firm will typically finance the exercise of the growth option with equity and may wait years before recapitalizing to a higher debt level. The lack of coordination between the timing of investment and debt financing helps explain a number of findings in the empirical literature, including violation of the financing pecking order, debt conservatism, apparent market timing of security issues, and more pronounced underperformance following equity issues than debt issues.

Keywords: Uncertain growth options; Security issue timing; Investment and financing interactions (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:41:y:2016:i:c:p:241-261

DOI: 10.1016/j.jcorpfin.2016.09.006

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