Does performance-sensitive debt mitigate debt overhang?

We model the expansion decision of a levered firm. Straight debt distorts both timing and scaling: firm invests less later than its all-equity financed counterpart. The inclusion performance sensitivity in contract mitigates such distortions. Moreover, is consistent with value maximization within standard trade-off theory capital structure. As result, our rationalizes widespread use sensitive (PSD), especially amongst fast growth firms.