Corporate Investment and Financing Dynamics

Dirk Hackbarth B · Dongming Sun

14 citations0/0 files storedThe Review of Corporate Finance Studies

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Corporate Finance and Governance Financial Analysis and Corporate Governance Capital Investment and Risk Analysis

Abstract

Abstract We consider the behavior of leverage ratios in a trade-off model with investment. Debt underutilization to retain financial flexibility persists even when firms exercise their last investment options, and it is more (less) severe for more back-loaded (front-loaded) investment opportunities. Leverage paths crucially hinge on the structure of the investment process, which leads firms to have significantly different target leverage ratios. Structural estimation of key parameters reveals that simulated model moments can match data moments. In simulated panels, leverage regression results are in line with the evidence, and average leverage ratios are path-dependent and persistent for extended periods of time. (JEL G31, G32)

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References

1958The Cost of Capital, Corporation Finance and the Theory of Investment 1977Determinants of corporate borrowing 2008The cost of capital, corporation finance and the theory of investment 1995What Do We Know about Capital Structure? Some Evidence from International Data 1992The investment opportunity set and corporate financing, dividend, and compensation policies 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt 2007Capital Structure Decisions: Which Factors Are Reliably Important?1994Corporate Debt Value, Bond Covenants, and Optimal Capital Structure

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