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Optimal Investment under Credit Constraints

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  • Mohamed BELHAJ
  • Bertrand DJEMBISSI

Abstract

We analyze in this paper the interaction between financing and investment decisions in presence of debt issuance costs. We find that, while debt issuance costs reduce tax shields, tax shields induce a higher investment trigger. Moreover, the investment trigger is a non-monotonic function of the borrowing capacity. Indeed, as credit constraints relax, entrepreneurs with small debt capacity speed up investment to exploit tax shields, whereas those with large debt capacity postpone investment to minimize default risk.

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File URL: http://www.jstor.org/stable/27917391
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Bibliographic Info

Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2009)
Issue (Month): 93-94 ()
Pages: 259-277

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Handle: RePEc:adr:anecst:y:2009:i:93-94:p:11

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Cited by:
  1. Mohamed Belhaj & Nataliya Klimenko, 2012. "On the Role of External Financing Costs in Optimal Investment Decisions," AMSE Working Papers, Aix-Marseille School of Economics, Marseille, France 1241, Aix-Marseille School of Economics, Marseille, France.
  2. Kit Wong, 2010. "On the neutrality of debt in investment intensity," Annals of Finance, Springer, Springer, vol. 6(3), pages 335-356, July.

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