Financing Investment: The Choice between Bonds and Bank Loans

48 Pages Posted: 18 Oct 2012 Last revised: 16 May 2014

See all articles by Erwan Morellec

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Philip Valta

University of Bern

Alexei Zhdanov

Pennsylvania State University

Date Written: May 15, 2014

Abstract

We build a model of investment and financing decisions to study the choice between bonds and bank loans in a firm's marginal financing decision and its effects on corporate investment. We show that firms with more growth options, higher bargaining power in default, operating in more competitive product markets, and facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence that supports our theory.

Keywords: debt structure, capital structure, investment, credit supply, competition

JEL Classification: D83, G12, G32, G33

Suggested Citation

Morellec, Erwan and Valta, Philip and Zhdanov, Alexei, Financing Investment: The Choice between Bonds and Bank Loans (May 15, 2014). HEC Paris Research Paper No. FIN-2013-1010, Swiss Finance Institute Research Paper No. 14-04, Available at SSRN: https://ssrn.com/abstract=2162896 or http://dx.doi.org/10.2139/ssrn.2162896

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

HOME PAGE: http://https://www.ifm.unibe.ch/about_us/people/prof_dr_valta_philip/

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,116
Abstract Views
5,387
Rank
35,907
PlumX Metrics