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Dynamic investment strategy and optimal capital structure under risk and ambiguity

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Listed:
  • Song, Dandan
  • Wang, Wenwei
  • Luo, Pengfei

Abstract

This paper introduces model uncertainty and risk management into a levered firm’s decision-making model based on a real option framework, and demonstrates the implications of ambiguity aversion to the optimal project initiation investment, productivity improved investment, hedging and financing decisions. The numerical results provide several important implications. Model uncertainty leads to underinvestment and reduces the firm value, the optimal coupon and also the leverage ratio. Besides, the firm value is enhanced and investment is accelerated accordingly with hedging. Especially, the more ambiguity-averse the manager is, the more significant the impact of hedging is.

Suggested Citation

  • Song, Dandan & Wang, Wenwei & Luo, Pengfei, 2025. "Dynamic investment strategy and optimal capital structure under risk and ambiguity," Finance Research Letters, Elsevier, vol. 86(PD).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pd:s1544612325018975
    DOI: 10.1016/j.frl.2025.108643
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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