Real and Financial Decisions of a Firm with Bankruptcy and Default: An Integration
This paper attempts to provide a framework for analyzing the interaction between real decisions (concerning investment and factor inputs)and financial decisions (concerning debt and new share issues) of a corporation. The model carries a rich menu of tax rates and explicitly incorporates bankruptcy and default. The firm's multi-period optimization problem is set up where real and financial decisions are simultaneously determined to maximize the value of the firm which is the market price of uncertain future dividends. The main results of the paper are as follows:if the firm's after-tax profits are small relative to investment, the firm finances new investment by retentions and debt; if they are large relative to investment, financing additional investment is done through new shares and debt; in the intermediate case, additional investment is financed entirely by debt.
|Date of creation:||Mar 1983|
|Date of revision:|
|Publication status:||published as Hayashi, Fumio. "Corporate Finance Side of the Q Theory of Investment," Journal of Public Economics, Vol. 27, No. 3, August 1985, pp. 261-280.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joseph E. Stiglitz, 1967.
"A Re-Examination of the Modigliani Miller Theorem,"
Cowles Foundation Discussion Papers
242, Cowles Foundation for Research in Economics, Yale University.
- Alan J. Auerbach, 1980.
"Wealth Maximization and the Cost of Capital,"
NBER Working Papers
0254, National Bureau of Economic Research, Inc.
- Robert S. Chirinko & Stephen R. King, 1985. "Hidden Stimuli to Capital Formation: Debt and the Incomplete Adjustment of Financial Returns," NBER Working Papers 1684, National Bureau of Economic Research, Inc.
- Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
- Fumio Hayashi, 1981.
"Tobin's Marginal q and Average a : A Neoclassical Interpretation,"
457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
- Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1097. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.