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Article: On the neutrality of debt in investment intensity

TitleOn the neutrality of debt in investment intensity
Authors
KeywordsCapital Structure
Investment Intensity
Investment Timing
Real Options
Issue Date2010
Citation
Annals Of Finance, 2010, v. 6 n. 3, p. 335-356 How to Cite?
AbstractThis paper examines the interaction between investment and financing decisions of a firm using a real options approach. The firm is endowed with a perpetual option to invest in a project at any time by incurring an irreversible investment cost at that instant. The amount of the irreversible investment cost is directly related to the intensity of investment that is endogenously chosen by the firm. At the investment instant, the firm can finance the project by issuing debt and equity, albeit subject to an exogenously given credit constraint that prohibits the firm's debt-to-asset ratio from exceeding a prespecified threshold. The optimal capital structure of the firm is determined by the trade-off between interest tax-shield benefits and bankruptcy costs of debt. Irrespective of whether the exogenously given credit constraint is binding or not, we show that leverage has no impact on the firm's optimal investment intensity, thereby rendering the neutrality of debt in investment intensity. Similar to earlier work, we show that debt is not neutral to investment timing in general, and the levered firm invests earlier than the unlevered firm in particular. © 2009 Springer-Verlag.
Persistent Identifierhttp://hdl.handle.net/10722/177774
ISSN
2015 SCImago Journal Rankings: 0.686
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_US
dc.date.accessioned2012-12-19T09:39:52Z-
dc.date.available2012-12-19T09:39:52Z-
dc.date.issued2010en_US
dc.identifier.citationAnnals Of Finance, 2010, v. 6 n. 3, p. 335-356en_US
dc.identifier.issn1614-2446en_US
dc.identifier.urihttp://hdl.handle.net/10722/177774-
dc.description.abstractThis paper examines the interaction between investment and financing decisions of a firm using a real options approach. The firm is endowed with a perpetual option to invest in a project at any time by incurring an irreversible investment cost at that instant. The amount of the irreversible investment cost is directly related to the intensity of investment that is endogenously chosen by the firm. At the investment instant, the firm can finance the project by issuing debt and equity, albeit subject to an exogenously given credit constraint that prohibits the firm's debt-to-asset ratio from exceeding a prespecified threshold. The optimal capital structure of the firm is determined by the trade-off between interest tax-shield benefits and bankruptcy costs of debt. Irrespective of whether the exogenously given credit constraint is binding or not, we show that leverage has no impact on the firm's optimal investment intensity, thereby rendering the neutrality of debt in investment intensity. Similar to earlier work, we show that debt is not neutral to investment timing in general, and the levered firm invests earlier than the unlevered firm in particular. © 2009 Springer-Verlag.en_US
dc.languageengen_US
dc.relation.ispartofAnnals of Financeen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsThe original publication is available at www.springerlink.com-
dc.subjectCapital Structureen_US
dc.subjectInvestment Intensityen_US
dc.subjectInvestment Timingen_US
dc.subjectReal Optionsen_US
dc.titleOn the neutrality of debt in investment intensityen_US
dc.typeArticleen_US
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_US
dc.identifier.authorityWong, KP=rp01112en_US
dc.description.naturepostprinten_US
dc.identifier.doi10.1007/s10436-009-0137-7en_US
dc.identifier.scopuseid_2-s2.0-77952421663en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-77952421663&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume6en_US
dc.identifier.issue3en_US
dc.identifier.spage335en_US
dc.identifier.epage356en_US
dc.publisher.placeGermanyen_US
dc.identifier.scopusauthoridWong, KP=7404759417en_US
dc.identifier.citeulike5820471-

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