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Investment timing under debt issuance constraint

  • Shibata, Takashi
  • Nishihara, Michi

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.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 4 ()
Pages: 981-991

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:981-991
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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