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The impact of assets-in-place on corporate financing and investment decisions

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  • Clausen, Saskia
  • Flor, Christian Riis

Abstract

In a dynamic setting with asymmetric information we consider firms’ debt-equity choice and investment timing. We extend recent research by adding an abandonment option and assets-in-place and we show that these extensions make debt more attractive. This implies, e.g., that mature firms (with larger assets-in-place) mainly use debt financing, whereas young high-growth firms (without assets-in-place) frequently use equity financing and signal their type by early investment. Simulation analyses confirm this and our model is thus able to explain empirical patterns which contradict the static pecking order theory.

Suggested Citation

  • Clausen, Saskia & Flor, Christian Riis, 2015. "The impact of assets-in-place on corporate financing and investment decisions," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 64-80.
  • Handle: RePEc:eee:jbfina:v:61:y:2015:i:c:p:64-80
    DOI: 10.1016/j.jbankfin.2015.08.020
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic investment model; Asymmetric information; Debt-equity choice; Limited liability; Assets-in-place;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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