Publication

Investment timing, debt structure, and financing constraints

2015
Journal Articles

Abstract

We introduce debt issuance limit constraints along with market debt and bank debt to consider how financial frictions affect investment, financing, and debt structure strategies. Our model provides four important results. First, a firm is more likely to issue market debt than bank debt when its debt issuance limit increases. Second, investment strategies are nonmonotonic with respect to debt issuance limits. Third, debt issuance limits distort the relationship between a firm's equity value and investment strategy. Finally, debt issuance limit constraints lead to debt holders experiencing low risk and low returns. That is, the more severe the debt issuance limits are, the lower are the credit spreads and default probabilities. Our theoretical results are consistent with stylized facts and empirical results. (C) 2014 Elsevier B.V. All rights reserved.

Official source

https://infoscience.epfl.ch/entities/publication/f6dcfc7a-ccf2-45b0-b0fc-dbc692e81829

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2015
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/f6dcfc7a-ccf2-45b0-b0fc-dbc692e81829

About this result

Related concepts (32)

Debt

Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. In financial accounting, debt is a type of financial transaction, as distinct from equity.

Debt crisis

Debt crisis is a situation in which a government (nation, state/province, county, or city etc.) loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, the government may enter into a debt crisis. Various forms of governments finance their expenditures primarily by raising money through taxation. When tax revenues are insufficient, the government can make up the difference by issuing debt.

Government debt

A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occurs when a government's expenditures exceed revenues. Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's external debt. In 2020, the value of government debt worldwide was $87.

Related publications (32)

Investment timing, debt structure, and financing constraints

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Online appendix to: Debt dynamics with fixed issuance costs