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Financing Investment: The Choice Between Bonds and Bank Loans

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  • Erwan Morellec

    (EPFL (École Polytechnique Fédérale de Lausanne), Swiss Finance Institute, CH-1015 Lausanne, Switzerland; and Centre for Economic and Policy Research, London EC1V 3PZ, United Kingdom)

  • Philip Valta

    (Geneva School of Economics and Management, University of Geneva, 1211 Geneva, Switzerland; and Swiss Finance Institute, 1211 Geneva, Switzerland)

  • Alexei Zhdanov

    (Panagora Asset Management, Boston, Massachusetts 02210)

Abstract

We build a model of investment and financing decisions to study the choice between bonds and bank loans in a firm’s marginal financing decision and its effects on corporate investment. We show that firms with more growth options, with higher bargaining power in default, operating in more competitive product markets, or facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence that supports our theory.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2005 . This paper was accepted by Gustavo Manso, finance.

Suggested Citation

  • Erwan Morellec & Philip Valta & Alexei Zhdanov, 2015. "Financing Investment: The Choice Between Bonds and Bank Loans," Management Science, INFORMS, vol. 61(11), pages 2580-2602, November.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:11:p:2580-2602
    DOI: 10.1287/mnsc.2014.2005
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    More about this item

    Keywords

    debt choice; capital structure; investment; credit supply; competition;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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