Dynamic models of investment distortions

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

This paper studies the interaction between corporate financing decisions and investment decisions in a dynamic framework. When the production decision involves an expansion option, the firm trades off tax benefits of debt against two costs of debt financing, namely the investment distortion related to exercise of the expansion option and the loss of a valuable expansion opportunity if the firm defaults. The optimal capital structure is all equity for firms with more value in growth options (or intangible assets) and tends to involve debt financing for firms with more value in tangible assets.

Original languageEnglish
Pages (from-to)357-381
Number of pages25
JournalReview of Quantitative Finance and Accounting
Volume25
Issue number4
DOIs
Publication statusPublished - 2005 Dec 1
Externally publishedYes

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Keywords

  • Debt-overhang
  • Growth options
  • Underinvestment

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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