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Financing Investment: The Choice between Bonds and Bank Loans

  • Morellec , Erwan


  • Valta , Philip


  • Zhdanov , Alexei


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.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 1010.

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Length: 47 pages
Date of creation: 10 Dec 2013
Date of revision:
Handle: RePEc:ebg:heccah:1010
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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