Investment timing under debt issuance constraint

This paper examines the optimal investment timing decision problem of a firm subject to a debt financing capacity constraint. We show that the investment thresholds have a U-shaped relation with the debt capacity constraint, in that they are increasing (decreasing) with the constraint for high (low) debt issuance capacity. Although the financing constraint distorts investment timing, it may encourage the constrained levered firm to overinvest compared with the non-constrained levered firm. Our result fits well with the related problems involving the internal financing constraint.     

Investment-based financing constraints and debt renegotiation

We consider how equity holders’ bargaining power during financial distress influences the interactions between financing and investment decisions when the firm faces the upper limit of debt issuance. We obtain four results. First, weaker equity holders’ bargaining power is more likely that the firm is financially constrained. Second, the investment quantity is independent of equity holders’ bargaining power. Third, the constrained credit spreads are increasing with equity holders’ bargaining power, contrary to the unconstrained ones. Fourth, higher volatility and weaker equity holders’ bargaining power are likely that the firm prefers to issue debt with renegotiation, compared with debt without renegotiation.     

INFLATION,INVESTMENT, AND DEBT

In this paper the effect of inflation on firms' investment and debt-financing decisions is examined. Inflation affects optimal investment and financing directly through the probability of accounting loss and the real value of depreciation and interest tax shields. In addition, when corporate and differential personal taxes cause investment and financing decisions to interact, inflation has indirect effects on these decisions through their interactions. In general, the overall effects of inflation on optimal investment and debt are ambiguous in sign. For tax-exempt firms, however, optimal investment and debt are independent of inflation. For firms that are always in a tax-paying position, higher inflation reduces optimal investment without affecting optimal debt. Furthermore, inflation causes total firm value to decrease if the depreciation rate exceeds the firm's debt/asset ratio.     

The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts

Many firms issue hybrid securities, such as convertible debt, instead of standard securities like straight debt or common equity. Theoretical arguments suggest that convertible debt minimizes costs for firms facing high debt- and equity-related external financing costs. Theory also suggests that an appropriately designed convertible security provides efficient investment incentives. We show, however, that firms on average perform poorly following the issuance of convertible debt. The empirical evidence suggests that the efficient investment decisions predicted by theory are not in fact achieved by the actual design and issuance of convertible debt securities. An alternative interpretation of convertible debt offers is that investors ration the participation of some issuers in the seasoned equity market.     

Do Lending Relationships Affect Corporate Financial Policies?

This paper provides new evidence on how lending relationships impact firms’ financing and investment decisions. I find that lending relationships have a significant impact on leverage ratios, issuance choices, and the investment structures of relationship borrowers. The influence of relationships is heightened for financially constrained firms. I find a significant decrease in leverage, net debt issuing, and investment activity in the aftermath of lender‐specific shocks to lending relationships, including announcements of bank write‐downs and downgrades in banks’ credit ratings. My findings are robust to controlling for confounding effects that might arise due to unobserved demand and relationship changes.     

Short‐Term Debt as Bridge Financing: Evidence from the Commercial Paper Market

We analyze why firms use nonintermediated short‐term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start‐up financing for capital investment. Firms’ CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long‐term bond issuance to reduce rollover risk.     

Foreign capital raising by Indian firms: An examination of domestic stock price response

We examine the domestic stock price response to foreign capital issuance by Indian firms. Firms have extensively used foreign equity and convertible foreign debt sources since 1994. The role of foreign investment bankers, size of the issue, firm's growth opportunities, and other factors are examined in the cross-sectional analysis of domestic stock price response. We find that firms experience positive stock price response to both equity and debt issues abroad, with greater response to issuance of American Depositary Receipts (ADRs), and financing high corporate growth.     

Banks,firms and the relative pricing of tax-exempt and taxable bonds

The traditional analysis of the relative pricing of tax-exempt and taxable debt is a habitat theory of the term structure of interest rates. In the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets. Recent work by Fama (1977) suggests that banks are potential arbitrageurs across tax-exempt and taxable bond markets which force a particular equilibrium on the pricing of short-term bonds. Miller (1977) suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax-exempt and taxable bonds. This paper exploits the institution of Regulation Q and its effects on the banking system to bring evidence to bear on the predictions of these three models.     

房地产上市公司融资模式对投资行为的影响

借鉴 Aivazianetal 简化投资模型建立了融资模式对投资行为影响的理论模型,基于1998~2012年的面板数据,实证研究不同产权属性和不同规模房地产上市公司融资模式对投资行为的影响。研究发现：房地产上市公司的债务融资会促使投资增长,而股权融资会减少投资,内源性融资与投资行为的相关性并不显著;国有房地产上市公司的投资行为更加积极;大规模房地产上市公司受外部融资约束更强。为此,应完善房地产上市公司治理结构、拓宽融资渠道。     

Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

This paper hypothesizes that hot convertible debt windows represent periods with lower convertible debt-related financing costs. Supporting this premise, we find that the stock price impact of Western European convertible debt announcements is significantly less negative during hot convertible debt windows. Importantly, this result holds while controlling for equity and straight debt issuance volumes and for macroeconomic conditions. In addition, stockholders are less sensitive to issuer- and issue-specific financing costs during hot convertible debt markets. Overall, these findings indicate that hot convertible debt markets represent windows of opportunity for convertible debt issuance. Firms with high idiosyncratic financing costs act accordingly by timing their convertible debt offering during a hot market.     

Investment and financing activity following calls of convertible bonds

The staged financing hypothesis of Mayers [Mayers, D., 1998. Why firms issue convertible bonds: The matching of financial and real investment options. Journal of Financial Economics 47, 83–102] predicts that investment and financing activity will increase following in the money convertible bond calls. The prediction for out of the money convertible calls is different: no increase is expected. We study the rate of both corporate investment and external financing around forced conversions using benchmarks that are analogous to those recommended by Barber and Lyon [Barber, B., Lyon, J., 1996. Detecting abnormal operating performance: The empirical power and specification of test statistics. Journal of Financial Economics 41, 359–400]. We also examine the cross-section of changes in investment and financing activity. Conversion-forcing firms exhibit an increase in both capital expenditures and debt financing around the year of the convertible bond call; however, the same result holds for the sample firms that conducted out-of-the-money convertible calls. Further, there is no relation between changes in investment activity and changes in debt issuance at the firm level. The evidence is inconsistent with the notion that forced conversions serve as a catalyst for staged financing and investment.     

The Relationship between Investment and Asset Life

Optimal investment in an asset and its optimal life are shown to be interrelated through operating cash flows and depreciation allowance, as well as book and salvage values upon termination; thus they are determined simultaneously. Asset life and investment are positively (negatively) related if delaying abandonment increases (reduces) the benefit of marginal investment. If investment and asset life are positively related, increased debt financing or allowable depreciation positively impact on them; otherwise, the impact is ambiguous in sign. Further, investment in a zero salvage value asset and its holding period increase with depreciation or leverage when (1) its cash flows form an annuity or (2) the firm employing it is tax-exempt.     

Is cash negative debt? A hedging perspective on corporate financial policies

We show theoretically that while cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt is a more effective way to boost investment in future high cash flow states. Thus, constrained firms prefer higher cash to lower debt if their hedging needs are high, but lower debt to higher cash if their hedging needs are low. We provide empirical evidence that supports our theory. Our analysis points to an important hedging motive behind cash and debt management policies. It suggests that cash should not be viewed as negative debt in the presence of financing frictions.     

Investment financing: evidence from Korea

This study examines the relative importance of various forms of capital in financing investments by Korean firms. Our results from the seemingly unrelated regression (SUR) method indicate that, unlike U.S. firms, Korean firms rely substantially on cash holdings to finance investments. These results also suggest that Korean firms use long‐term debt more actively than equity issuance to finance investments. Subgroup analyses show that large firms and Chaebol‐affiliated firms use more long‐term debt but less equity issuance than comparison firms do, suggesting that debt capacity allows firms to reduce the use of equity issuance. However, there is little evidence that financing decisions are driven by information asymmetry. The results from the quantile regression (QR) method suggest that Korean firms tend to use debt capital more than they do equity capital at low and medium levels of investments, while their reliance on equity capital increases at high levels of investments.     

An investigation of the asymmetric link between credit re-ratings and corporate financial decisions: “Flicking the switch” with financial flexibility

Using a large sample of non-financial US listed firms over the period from 1985 to 2009, we analyze the interactive effect of financial flexibility and credit re-ratings on corporate investment and financing decisions. Essentially, we document that financial flexibility (inflexibility) “flicks the switch” in the re-rating upgrades (downgrades) scenario. Specifically, a credit rating upgrade (downgrade) for financially flexible firms is followed by a reduction (no change) in their cost of capital, an increase (no change) in their capital expenditure and an increase (no change) in their net debt versus net equity issuance. In contrast, a rating upgrade (downgrade) for financially inflexible firms is followed by an insignificant change (an increase) in their cost of capital, an insignificant change (a decrease) in their capital expenditure and an insignificant change (a decrease) in their net debt versus net equity issuance. We offer plausible explanations for these asymmetric relations.     

Does financing influence the sensitivity of cash and investment to asset tangibility?

Research shows that asset tangibility substantially impacts firms’ cash levels and investment. Using the deregulation of equity issuance in the U.S. as an exogenous shock to access to equity markets, we investigate the influence of financing on the dependence of cash and investment on asset tangibility. We show that financing dampens the sensitivity of cash and investment to asset tangibility, and promotes investment and firm growth. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up. This provides evidence that public firms even in well-developed financial markets such as the U.S. benefit from financial deregulation that removes barriers to external financing, shedding light on the role of financial markets in fostering growth.     

On the neutrality of debt in investment intensity

This paper examines the interaction between investment and financing decisions of a firm using a real options approach. The firm is endowed with a perpetual option to invest in a project at any time by incurring an irreversible investment cost at that instant. The amount of the irreversible investment cost is directly related to the intensity of investment that is endogenously chosen by the firm. At the investment instant, the firm can finance the project by issuing debt and equity, albeit subject to an exogenously given credit constraint that prohibits the firm’s debt-to-asset ratio from exceeding a prespecified threshold. The optimal capital structure of the firm is determined by the trade-off between interest tax-shield benefits and bankruptcy costs of debt. Irrespective of whether the exogenously given credit constraint is binding or not, we show that leverage has no impact on the firm’s optimal investment intensity, thereby rendering the neutrality of debt in investment intensity. Similar to earlier work, we show that debt is not neutral to investment timing in general, and the levered firm invests earlier than the unlevered firm in particular.     

SUSTAINABLE GROWTH AND CHOICE OF FINANCING: A TEST OF THE PECKING ORDER HYPOTHESIS

This paper studies the impact of sales growth above a sustainable level on the financing choices of the firm. Myers [1984] indicates that firms typically employ a pecking order of financing choices, using internal equity before the issuance of external debt, followed by the issuance of external equity. Contingency table analysis performed in this paper provides indirect evidence that the faster firms are growing, the more they use up available internal financing and, thus, must raise funds externally. In addition, logit analysis shows that firms with lower asymmetric information tend to raise the majority of their funds externally, with debt being the primary choice. Together, both sets of results provide indirect support for Myers' pecking order theory since it appears that firms use available internal financing, then debt, then new equity to finance growth.     

Family Control and Financing Decisions

This study uses a comprehensive European dataset to investigate the role of family control in corporate financing decisions during the period 1998–2008. We find that family firms have a preference for debt financing, a non‐control‐diluting security, and are more reluctant than non‐family firms to raise capital through equity offerings. We also find that credit markets are prone to provide long‐term debt to family firms, indicating that they view their investment decisions as less risky. In fact, our empirical results demonstrate that family firms invest less than non‐family firms in high‐risk, research and development (R&D) projects, but not in low‐risk, fixed‐asset capital expenditure (CAPEX) projects, suggesting that fear of control loss in family firms deters risk‐taking. Overall, our findings reveal that the external financing (and investment) decisions of family firms are in greater (lesser) conflict with the interests of minority shareholders (bondholders).     

Capital structure and large investment projects

This paper provides empirical evidence that lumpy investment projects provide firms with the opportunity to adjust leverage at low marginal cost. Consistent with a theoretical model, I find that 1) firms sequence equity before debt during the financing period of their investment projects, and 2) that firms adjust their leverage ratios toward their target leverage during these investment periods. I also show that proactive increases in leverage observed in other studies can be explained by the evolution of firms' target leverage ratios over the financing period of a project. My results are consistent with trade-off theory and imply that firms move toward their target capital structures when they invest.