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Financing uncertain growth

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  • Li, Jay Y.
  • Mauer, David C.

Abstract

We examine interactions between investment and financing decisions in a dynamic model where the firm can alter the mix of debt and equity financing and exercise a randomly arriving and potentially short lived growth option. The firm will typically finance the exercise of the growth option with equity and may wait years before recapitalizing to a higher debt level. The lack of coordination between the timing of investment and debt financing helps explain a number of findings in the empirical literature, including violation of the financing pecking order, debt conservatism, apparent market timing of security issues, and more pronounced underperformance following equity issues than debt issues.

Suggested Citation

  • Li, Jay Y. & Mauer, David C., 2016. "Financing uncertain growth," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 241-261.
  • Handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:241-261
    DOI: 10.1016/j.jcorpfin.2016.09.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Uncertain growth options; Security issue timing; Investment and financing interactions;

    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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