The impact of assets-in-place on corporate financing and investment decisions

- We consider a firm's debt-equity choice and investment timing in a dynamic setting.
- We extend recent research by adding an abandonment option and assets-in-place.
- Debt is often used; good, mature firms with AIP mainly use debt financing.
- Young firms frequently use equity financing and signal their type by early investment.
- Empirical patterns contradicting the static pecking order theory are explained.

In a dynamic setting with asymmetric information we consider firms' debt-equity choice and investment timing. We extend recent research by adding an abandonment option and assets-in-place and we show that these extensions make debt more attractive. This implies, e.g., that mature firms (with larger assets-in-place) mainly use debt financing, whereas young high-growth firms (without assets-in-place) frequently use equity financing and signal their type by early investment. Simulation analyses confirm this and our model is thus able to explain empirical patterns which contradict the static pecking order theory.