The Value of Financial Constraints
14 Pages Posted: 1 Mar 2018
Date Written: March 1, 2018
We solve a deterministic impulse control problem with state dependent continuous control constraints. Impulses shift the state variable, altering subsequent continuous control constraints, making established methods difficult to apply. These functionals arise in the context of firm valuation, where capital drives cash flows with diminishing returns, and investment increases capital stock. Continous control constraints capture the firm's investment opportunities. Our model leads to a generalization of the Irrelevance Theorem derived by  for firms 'out of equilibrium'. We derive optimal equity and debt finance and determine the value of financial constraints.
Keywords: Impulse Control, Control Constraints, Financial Constraints
JEL Classification: J15, N25
Suggested Citation: Suggested Citation