Valuing Corporate Financing Strategies

45 Pages Posted: 17 Mar 2008 Last revised: 23 Dec 2019

See all articles by Andrea Gamba

Andrea Gamba

University of Warwick - Finance Group

Alexander J. Triantis

Johns Hopkins University - Carey Business School; University of Maryland - Robert H. Smith School of Business

Date Written: July 2008

Abstract

We develop a dynamic structural model of the firm that allows us to carefully analyze the value of alternative financing strategies. We first illustrate the benefits of joint versus separate optimization of dynamic financing and investment policies. We then examine the impact on firm value of investment and financing distortions due to financial agency conflicts, and highlight the compounding of these two distortions in a fully dynamic setting. We show that simple debt contract covenants designed to restrict financing or investment behavior can decrease agency costs quite effectively. We also investigate the performance of various simple financing policy heuristics. We find that these heuristics fail to capture the full value of debt financing, even though the resulting leverage distributions may appear similar to those of optimized financing policies. Generally, our results suggest that firm values can be quite sensitive to the exact specification of financing policies in a dynamic setting.

Suggested Citation

Gamba, Andrea and Triantis, Alexander J., Valuing Corporate Financing Strategies (July 2008). EFA 2009 Bergen Meetings Paper, WBS Finance Group Research Paper No. 94, Available at SSRN: https://ssrn.com/abstract=1101902 or http://dx.doi.org/10.2139/ssrn.1101902

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Alexander J. Triantis (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-2246 (Phone)
301-314-9157 (Fax)

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