The External Financing of Investment

41 Pages Posted: 15 Jun 2017 Last revised: 4 Apr 2019

See all articles by Bruce D. Grundy

Bruce D. Grundy

University of Melbourne

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: April 3, 2019

Abstract

Investment characteristics and the form of external financing are linked. Factor analysis indicates that the principal determinant of the financing choice is whether an investment’s payoffs can be described as a hit or miss. Hit-or-miss investments are more likely to be equity financed. Equity also becomes more common the longer the time until an investment produces positive payoffs. Debt financing is more likely for investments that are both tangible and non-unique. For R&D-like investments, equity and bank debt financing are more likely than non-bank debt financing. Convertible securities link to uncertain investment lives and are therefore useful for sequential financing.

Keywords: Investment characteristics, financing, debt-equity choice, convertible securities

JEL Classification: E22, G32

Suggested Citation

Grundy, Bruce D. and Verwijmeren, Patrick, The External Financing of Investment (April 3, 2019). Available at SSRN: https://ssrn.com/abstract=2986127 or http://dx.doi.org/10.2139/ssrn.2986127

Bruce D. Grundy

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
Australia
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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