Financing Uncertain Growth

63 Pages Posted: 7 Jul 2011 Last revised: 10 Nov 2016

See all articles by Jay Y. Li

Jay Y. Li

University of North Carolina at Greensboro

David C. Mauer

University of North Carolina (UNC) at Charlotte

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

Li, Jay Y. and Mauer, David C., Financing Uncertain Growth (September 12, 2016). Available at SSRN: or

Jay Y. Li

University of North Carolina at Greensboro ( email )

Department of Accounting and Finance
Greensboro, NC
United States
336 334 5647 (Phone)

David C. Mauer (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7707 (Phone)

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