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015004 ts?of nt?Sp ghts?reserved iscussion?and the?consent?o f?the pike d.? d?comment?p of?the?copyrig e?Fin s? ? urposes?only. ght?holder.? nanc .?Any?addition cing? nal? ? Determinants of the Financing of Investment Spikes Hyun Joong Im? Peking University April 1,

2015 Abstract This study investigates how ?rms meet exceptional ?nancing needs at the time of investment spikes or years with unusually large investment programs, and ?nds that the ?nancing of in- vestment during an investment spike differs from that at other times, using data for publicly traded US ?rms from

1988 to 2013. At the time of investment spikes, external ?nance, partic- ularly debt ?nance, is more important than internal ?nance. However, ?rms with smaller ?rm size, lower pro?tability, more future growth opportunities, fewer tangible assets, and greater R&

D spending tend to use more equity ?nance. This study ?nds that large ?rms'

?nancing patterns are consistent with the pecking-order theory in the short run and with the trade-off theory in the long run, but small ?rms'

?nancing patterns are neither consistent with pecking- order theory in the short run nor with the trade-off theory in the long run. JEL classi?cation: G31, G32, G34, E22 Keywords: Capital Structure, Financing Patterns, Lumpy Investment, Investment Spikes ?Address: HSBC Business School, Peking University, University Town, Nanshan District, Shenzhen, 518055, CHINA, Tel: +86 (0)755

2603 3627, Fax: +86 (0)755

2603 5344, Email: [email protected]

1 Introduction The lumpiness of investment has been well known to economists since Doms and Dunne'

s (1998) in?uential work showing that plant-level investment is lumpy, using plant-level investment data from US Census Bureau micro data ?les (Caballero et al., 1995;

Power, 1994;

Cooper et al., 1999). Firm-level investment is found to be less lumpy than plant-level investment because of the aggregation effect, but there is still a large body of literature suggesting that aggregation does not substantially eliminate the lumpiness of ?rm-level investment (Caballero and Engel, 1999;

Doyle and Whited, 2001). In addition, there are several plausible theoretical explanations for the lumpiness of investment. Scholars have attempted to explain lumpy investment patterns through the ideas of non-convex capital adjustment costs (Rothchild, 1971), irreversibility of investment (Pindyck, 1991;

Dixit, 1995;

Dixit and Pindyck, 1994), and external ?nancing costs arising from ?nancing constraints (Whited, 2006). Nevertheless, the majority of existing empirical corporate ?nance studies have not effectively considered the lumpiness of investment until recently1. A widely accepted result is that the dominant source of ?nance of ?rms across different countries and time periods is retained earnings (see Mayer (1988), Corbett and Jenkinson (1997), and Rajan and Zingales (1995)). However, this is primarily indicative of how ?rms ?nance their routine, replacement investment rather than non-routine, expansion investment. Recently, the way in which ?rms meet exceptional ?nancing needs in relation to unusually large investment opportunities has become a central subject of an emerging body of literature in- cluding DeAngelo et al. (2011). They built a dynamic capital structure model in which ?rms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment spikes. They found that their model explains ?rms'