The External Financing of Investment

Controlling for a firm’s existing assets, capital structure and valuation, we document a strong link between an investment’s characteristics and the type of security issued if the investment is externally financed. Investments with more volatile and distant payoffs tend to be equity-financed. Investments in assets that are both tangible and non-unique tend to be debt-financed. The likelihood of debt financing increases with the need for monitoring and convertibles are relatively more common when payoffs are volatile and investment life is uncertain. Factor analysis indicates that the principal dimension determining the form of financing is the R&D-like nature of an investment.