Real and Financial Decisions of a Firm with Bankruptcy and Default: An Integration

67 Pages Posted: 23 Aug 2000 Last revised: 3 Jul 2010

See all articles by Fumio Hayashi

Fumio Hayashi

National Graduate Institute for Policy Studies; Harvard University - Department of Economics

Date Written: March 1983

Abstract

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.

Suggested Citation

Hayashi, Fumio, Real and Financial Decisions of a Firm with Bankruptcy and Default: An Integration (March 1983). NBER Working Paper No. w1097. Available at SSRN: https://ssrn.com/abstract=228029

Fumio Hayashi (Contact Author)

National Graduate Institute for Policy Studies ( email )

Roppongi 7-22-1
Minato-ku
Tokyo, 106-0032
Japan

HOME PAGE: http://https://sites.google.com/site/fumiohayashi/home

Harvard University - Department of Economics

Littauer Center
Cambridge, MA 02138
United States

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