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Financing Investment: The Choice between Bonds and Bank Loans

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  • Morellec , Erwan

    ()

  • Valta , Philip

    ()

  • Zhdanov , Alexei

    ()

Abstract

We build a dynamic 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 which supports our theory.

Suggested Citation

  • Morellec , Erwan & Valta , Philip & Zhdanov , Alexei, 2013. "Financing Investment: The Choice between Bonds and Bank Loans," Les Cahiers de Recherche 1010, HEC Paris.
  • Handle: RePEc:ebg:heccah:1010
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    Cited by:

    1. Hugonnier, Julien & Malamud, Semyon & Morellec, Erwan, 2015. "Credit market frictions and capital structure dynamics," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1130-1158.

    More about this item

    Keywords

    debt structure; capital structure; investment; credit supply; competition;

    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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