Capital investment timing and convertible debt financing

Abstract

We provide preliminary evidence that firms time capital investment decisions in a manner consistent with prescriptions from the real options literature. A prominent model of investment timing implies that firms with high-expected growth, high volatility, and low capital costs should defer investment longest. We examine capital expenditure patterns for a sample of 719 firms following issuance of convertible bonds because of the hypothesized role of these instruments in sequential investment. The findings are consistent with predictions: i.e., firms exhibiting high-growth prospects, high volatility, and low capital costs tend to defer subsequent investment longer.