The Value of Financial Constraints

14 Pages Posted: 1 Mar 2018

See all articles by Gerhard Kling

Gerhard Kling

University of London - School of Oriental and African Studies (SOAS)

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 [1] 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

Kling, Gerhard, The Value of Financial Constraints (March 1, 2018). Available at SSRN: or

Gerhard Kling (Contact Author)

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

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