Investment timing, debt structure, and financing constraints

Takashi Shibata () and Michi Nishihara

European Journal of Operational Research, 2015, vol. 241, issue 2, 513-526

Abstract: We introduce debt issuance limit constraints along with market debt and bank debt to consider how financial frictions affect investment, financing, and debt structure strategies. Our model provides four important results. First, a firm is more likely to issue market debt than bank debt when its debt issuance limit increases. Second, investment strategies are nonmonotonic with respect to debt issuance limits. Third, debt issuance limits distort the relationship between a firm’s equity value and investment strategy. Finally, debt issuance limit constraints lead to debt holders experiencing low risk and low returns. That is, the more severe the debt issuance limits are, the lower are the credit spreads and default probabilities. Our theoretical results are consistent with stylized facts and empirical results.

Keywords: Finance; Investment strategies; Real options; Debt structure; Debt issuance limit constraints (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:241:y:2015:i:2:p:513-526

DOI: 10.1016/j.ejor.2014.09.011

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