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Investment, Capital Structure, and Complementarities Between Debt and New Equity

Author

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  • Rune Stenbacka

    (Swedish School of Economics and Business Administration, Helsinki, Finland)

  • Mihkel Tombak

    (Queen's School of Business, Queen's University, Kingston, Ontario, Canada, K7L 3N6)

Abstract

We study simultaneous investment and financing decisions made by incumbent owners in the presence of capital market imperfections. We present a theory for how the optimal combination of debt and equity financing depends on the firm's internal funds. We identify complementarities between the two financial instruments. We test these predictions empirically with panel data on 3,119 corporations in the COMPUSTAT database. Our estimates using instrumental variable techniques support our theoretical predictions regarding the link between internal funds and capital investments, as well as the interaction effects between debt and new equity. We explore implications for managers, financiers, and policy makers.

Suggested Citation

  • Rune Stenbacka & Mihkel Tombak, 2002. "Investment, Capital Structure, and Complementarities Between Debt and New Equity," Management Science, INFORMS, vol. 48(2), pages 257-272, February.
    • Handle: RePEc:inm:ormnsc:v:48:y:2002:i:2:p:257-272
    DOI: 10.1287/mnsc.48.2.257.260
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    9. Mazouz, Khelifa & Daya, Wael & Yin, Shuxing, 2014. "Index revisions, systematic liquidity risk and the cost of equity capital," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 283-298.
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