Financing Uncertain Growth
63 Pages Posted: 7 Jul 2011 Last revised: 10 Nov 2016
Date Written: September 12, 2016
We examine interactions between investment and financing decisions in a dynamic model where the firm can alter the mix of debt and equity financing and exercise a randomly arriving and potentially short lived growth option. The firm will typically finance the exercise of the growth option with equity and may wait years before recapitalizing to a higher debt level. The lack of coordination between the timing of investment and debt financing helps explain a number of findings in the empirical literature, including violation of the financing pecking order, debt conservatism, apparent market timing of security issues, and more pronounced underperformance following equity issues than debt issues.
Keywords: Uncertain Growth Options, Security Issue Timing, Investment and Financing Interactions
JEL Classification: G31, G32, G33
Suggested Citation: Suggested Citation