Investment timing, reversibility, and financing constraints

This paper examines the optimal financing and investment decisions problem of a firm that is constrained by an upper limit of debt issuance based on liquidation (collateral) value. Our model provides five new results. First, an upper limit of debt issuance does not always delay corporate investment. Second, an upper limit does not affect the determination of investment quantity. Third, an upper limit may change bankruptcy strategies during financial distress via a change of capital structure. Fourth, an upper limit may induce the debt to move from risky to riskless. Fifth, an upper limit always decreases the leverage, credit spread, and default probability. (C) 2017 Elsevier B.V. All rights reserved.