Financing Investment: The Choice Between Bonds and Bank Loans
Erwan Morellec, Philip Valta, Alexei Zhdanov
Management Science · 2015 · Volume 61 · Issue 11
Abstract
We build a 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, with higher bargaining power in default, operating in more competitive product markets, or 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 that supports our theory. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2005 . This paper was accepted by Gustavo Manso, finance.
Keywords
debt choice, capital structure, investment, credit supply, competition
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