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Financing Investment: The Choice between Bonds and Bank Loans

Author

Listed:
  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

  • Philip Valta

    (University of Bern)

  • Alexei Zhdanov

    (Pennsylvania State University)

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, higher bargaining power in default, operating in more competitive product markets, and 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.

Suggested Citation

  • Erwan Morellec & Philip Valta & Alexei Zhdanov, 2014. "Financing Investment: The Choice between Bonds and Bank Loans," Swiss Finance Institute Research Paper Series 14-04, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1404
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    More about this item

    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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