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Dynamic Models of Investment Distortions

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  • Shih-Chuan Tsai

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    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. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11156-005-5460-0
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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 25 (2005)
    Issue (Month): 4 (December)
    Pages: 357-381

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    Handle: RePEc:kap:rqfnac:v:25:y:2005:i:4:p:357-381

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: growth options; underinvestment; debt-overhang;

    References

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    18. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    19. Michael J. Barclay & Clifford W. Smith, 1999. "The Capital Structure Puzzle: Another Look At The Evidence," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(1), pages 8-20.
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    Cited by:
    1. Djaoudath Alidou, 2012. "Employees Equity Issue and Asymmetric Information:Evidence from France - Augmentations de capital réservées aux salariés et Asymétrie d’information:Cas de la France," Working Papers CREGO 1120901, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    2. Chia-Chi Lu & Weifeng Hung & Jyh-Jian Sheu & Pai-Ta Shih, 2011. "Investment with network externality under uncertainty," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 555-564, May.

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