In a dynamic setting with asymmetric information we consider firms' debt-equity choice and investment timing. We extend recent research by adding an abandonment option and assets-in-place and we show that these extensions make debt more attractive. This implies, e.g., that mature firms (with larger assets-in-place) mainly use debt financing, whereas young high-growth firms (without assets-in-place) frequently use equity financing and signal their type by early investment. Simulation analyses confirm this and our model is thus able to explain empirical patterns which contradict the static pecking order theory.
|Translated title of the contribution||The Impact of Assets-in-Place on Corporate Financing and Investment Decisions|
|Journal||Journal of Banking & Finance|
|Publication status||Published - 1. Dec 2015|
- Asymmetric information
- Debt-equity choice
- Dynamic investment model
- Limited liability