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Investment timing under debt issuance constraint

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  • Shibata, Takashi
  • Nishihara, Michi

Abstract

This paper examines the optimal investment timing decision problem of a firm subject to a debt financing capacity constraint. We show that the investment thresholds have a U-shaped relation with the debt capacity constraint, in that they are increasing (decreasing) with the constraint for high (low) debt issuance capacity. Although the financing constraint distorts investment timing, it may encourage the constrained levered firm to overinvest compared with the non-constrained levered firm. Our result fits well with the related problems involving the internal financing constraint.

Suggested Citation

  • Shibata, Takashi & Nishihara, Michi, 2012. "Investment timing under debt issuance constraint," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 981-991.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:981-991
    DOI: 10.1016/j.jbankfin.2011.10.014
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    More about this item

    Keywords

    Real options; Capital structure; Debt financing constraint;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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