Systemic Influences on Optimal Equity-Credit Investment

E-companion to ‘Systemic Influences on Optimal Equity-Credit Investment’

Investment Options with Debt Financing and Differential Beliefs

A contingent claims model with differential beliefs between debt and equity holders about the asset’s growth rate and volatility is used to study the impact of differential information between debt and equity holders on firm value, optimal capital structure, the timing of investment and other variables such as the credit spreads. The model explains the existence of debt constraints when debt ho...

Stochastic Volatility , Bond Yields , and the Q Theory of Investment ∗

Recent empirical work using panel data documents that, while the correlation of investment and Tobin’s Q is low, the correlation of investment and credit spreads is high. We propose an explanation for these empirical findings, based on time-varying risk, i.e. stochastic volatility. In our model, firms finance investments using defaultable debt as well as equity issuance, and they are subject to...

An Optimal Investment Policy in Equity-Debt Financed Firms with Finite Maturities

In this paper we examine an optimal investment policy of the firm, which is financed by issuing equity and debt during a period of time, using real options framework. We examine the effects of the maturity of investment on the values of equity, debt, firm, tax shield and bankruptcy cost. Specifically, we show that the investment timing depends not only on the investment threshold but also on th...

Managerial Preferences , Corporate Governance , and Financial Structure ∗

Conflicts of interest between insiders (e.g, controlling shareholders) and outsiders (e.g., minority shareholders) are central to the analysis of modern corporation. In an integrated continuous-time contingent claims framework with imperfect corporate governance, we examine a controlling shareholder’s optimal choice of capital structure, ownership concentration, private benefit diversion, consu...