This study develops the real options model to explore how asymmetric information at the time of liquidation ex-post affects a firm’s financing (capital structure) and investment decisions ex-ante. Accordingly, it is found that asymmetric information at the time of liquidation delays investment and reduces the amount of debt issuance. When the degree of asymmetric information is high, the firm cannot take a mixed financing consisting of risky debt and equity. The firm with collateral takes a mixed financing consisting of risk-free debt and equity, whose debt issuance amount equals the collateral value, whereas the firm without collateral takes all-equity financing. This result contrasts with that under symmetric information, where the firm always issues a mix of risky debt and equity. Moreover, when the degree of asymmetric information is substantial, an increase in cash inflow volatility decreases debt issuance. This result also contrasts with that under symmetric information, where an increase in volatility increases debt issuance.

We consider how equity holders’ bargaining power during financial distress influences the interactions between financing and investment decisions when the firm faces the upper limit of debt issuance. We obtain four results. First, weaker equity holders’ bargaining power is more likely that the firm is financially constrained. Second, the investment quantity is independent of equity holders’ bargaining power. Third, the constrained credit spreads are increasing with equity holders’ bargaining power, contrary to the unconstrained ones. Fourth, higher volatility and weaker equity holders’ bargaining power are likely that the firm prefers to issue debt with renegotiation, compared with debt without renegotiation.