Time-to-Build and Leverage Dynamics

39 Pages Posted: 31 May 2012

See all articles by Joshua R. Pierce

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce

Sergey Tsyplakov

University of South Carolina - Darla Moore School of Business

Jiebo Wang

affiliation not provided to SSRN

Date Written: March 23, 2012

Abstract

We consider the role of construction lags or time-to-build (TTB) in a firm’s dynamic investment and financing decisions. We conjecture that construction lags can lead firms to finance large projects with equity so as to maintain financial flexibility during the construction period. After project completion, firms will substitute towards debt financing. Using a unique measure of TTB, we uncover several facts regarding leverage dynamics that are consistent with this theory and are not easily explained by other theories. Firms occasionally undertake large discrete investment projects, often after sharp increases in stock price, and these projects are associated with active capital structure adjustments. The longer the TTB for a given project, the more firms rely on equity in the financing of the project. As project completion nears, firms tend to substitute from equity towards debt financing. The incremental information of TTB factors in predicting capital structure choices appears to be substantial.

Keywords: capital structure, leverage, investment dynamics

JEL Classification: G31, G32

Suggested Citation

Pierce, Joshua R. and Tsyplakov, Sergey and Wang, Jiebo, Time-to-Build and Leverage Dynamics (March 23, 2012). Available at SSRN: https://ssrn.com/abstract=2028098 or http://dx.doi.org/10.2139/ssrn.2028098

Joshua R. Pierce (Contact Author)

University of Alabama Culverhouse College of Commerce ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Sergey Tsyplakov

University of South Carolina - Darla Moore School of Business ( email )

Francis M. Hipp Building
Finance Department
Columbia, SC 29208
United States
803-777-4669 (Phone)
803-777-6876 (Fax)

HOME PAGE: http://dmsweb.moore.sc.edu/tsyplakov/

Jiebo Wang

affiliation not provided to SSRN

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