Abstract:This paper examines a firm's investment/financing decision when it uses loancommitment-type debt with performance-sensitivity features. This analysis is of interest because most corporate borrowing today is by means of private debt, which tends to be of the loan-commitment type as well as contain performance-sensitivity provisions. We show that, except for the case of low leverage ratio, performance-sensitive debt makes shareholders better off relative to fixed-coupon debt. In particular, when the leverage rat… Show more
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