Influence Of Time-to-build On Company Decision Under Financing Debt Liquidity Constraints

The subprime mortgage crisis in 2008 triggered a serious market liquidity crisis,and the financing pressure of the company increased sharply.Without considering the debt liquidity risk,even many companies can not make the best decision according to the actual situation,resulting in frequent bankruptcy.In addition,there are many phenomena that the theoretical results are inconsistent with the empirical results,such as the empirical results of credit interest are significantly greater than the theoretical results.The importance of debt liquidity risk has been brought back into focus.In addition to the liquidity risk,the impact of time-to-build on the project is also critical.For example,mine development projects can take five to six years to complete,and the development of a new drug can take more than 10 years to complete.However,the impact of time-to-build is still ignored by many scholars.According to the above problems,this paper establish a real option model which describes the debt liquidity risk with random shock,and brings it into the framework of time-to-build.The model is solved by using numerical method,and obtained the leverage company’s optimal investment,financing and default decisions,and the impact of time-to-build and debt liquidity risk on the company’s optimal decision: When the company expects serious liquidity risk and longer time-to-build,shareholders will adopt conservative investment strategy,that is,delay investment.Shareholders will opt for less debt to reduce their exposure to high liquidity risk;Shareholders may choose to delay default to maximise the value of their equity,or wait longer to reduce leverage.For the " debt conservatism puzzle "," zero-leverage puzzle " and the problem of much bigger credit spreads are presented in this paper some of the more reasonable explanation: the high liquidity risk will reduce the value of the debt markets,forced shareholders to more to consider the possibility of default,so the shareholders can only take a more conservative financing strategies,issue less debt,and choose a lower leverage ratio to reduce the risk of default and survive the liquidity shock.For credit spreads,high levels of debt liquidity risk can almost double credit spreads,regardless of whether time-to-build is expected to be long or short,as bondholders fear a default and demand higher coupon payments from shareholders.