Investment, financing, strategic debt service, and liquidation

Michi Nishihara, Takashi Shibata and Yuan Tian

Quantitative Finance, 2025, vol. 25, issue 10, 1639-1655

Abstract: We develop a dynamic real options model to examine how the introduction of both collateral and debt renegotiation (i.e. strategic debt service) influences a firm's investment and financing (capital structure) decisions. Our findings show that the inclusion of these features accelerates investment and reduces debt issuance, resulting in lower credit spreads and higher leverage. When firms can issue one of two types of collateralized debt—bank (renegotiable) debt or market (non-renegotiable) debt—those with substantial collateral are more likely to prefer market debt over bank debt. These results are consistent with existing empirical evidence.

Date: 2025
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DOI: 10.1080/14697688.2025.2528693

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