Investment-based financing constraints and debt renegotiation |
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| Affiliation: | 1. Graduate School of Social Sciences, Tokyo Metropolitan University, 1-1 Minami-osawa, Hachioji, Tokyo 192-0397, Japan;2. Graduate School of Economics, Osaka University, 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan;3. Swiss Finance Institute, École Polytechnique Fédérale de Lausanne, 1015 Lausanne, Switzerland;1. Schools of Economics: Interdisciplinary Center, Tel-Aviv University and CEPR, Israel;2. Zicklin School of Business, Baruch College, United States;1. Department of Economics, University of Haifa, Haifa 31905, Israel;2. Research Department, Federal Reserve Bank Boston, 600 Atlantic Avenue, Boston, MA 02210, USA;1. University of Zurich, Department of Banking and Finance, Plattenstrasse 14, 8032 Zurich, Switzerland;2. University of Zurich, Department of Banking and Finance, Plattenstrasse 32, 8032 Zurich, Switzerland;3. ETH Zurich, Department of Mathematics, Rämistrasse 101, 8092 Zurich, Switzerland;1. University of Liège, HEC – Management School, Belgium;2. EDHEC Business School, Lille-Nice, France;3. Haute Ecole Fr. Ferrer, Brussels, Belgium;4. Maastricht University, School of Business and Economics, Maastricht, The Netherlands;5. Gambit Financial Solutions, Belgium |
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| Abstract: | 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. |
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| Keywords: | Real option Credit constraints Strategic debt service Capital structure |
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