Equity Financing and Investment in Technological Flexibility

45 Pages Posted: 2 Jan 2006

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

Armel Jacques

Université de la Réunion

Michel Moreaux

Institut Universitaire de France

Date Written: December 2005


We study the interactions between debt/equity financing and strategic (duopoly) technological flexibility choices of firms facing costly bankruptcy. We show that a firm's level of debt financing or financial hardship is an important determinant of the level and type of investment it chooses, either a less costly inflexible technology or a more expensive flexible technology. The level of financial hardship has a non-monotonic effect: as the level of equity financing increases, the choice of technology may switch and the level of investment may follow a bell-shaped or U-shaped path, depending on the differential investment cost, the bankruptcy cost, and whether or not the less costly technology is the best option for an all equity firm. We also show that the level of external financing (debt) may be used strategically in a non-cooperative tacitly collusive way to increase the expected profits of both firms, a firm may use debt as a commitment device to increase its own expected profit, and higher bankruptcy costs may be beneficial to both firms.

Keywords: Financial structure, Flexibility, Investment sensitivity

JEL Classification: L13, G32, D24

Suggested Citation

Boyer, Marcel and Jacques, Armel and Moreaux, Michel, Equity Financing and Investment in Technological Flexibility (December 2005). Available at SSRN: https://ssrn.com/abstract=873164 or http://dx.doi.org/10.2139/ssrn.873164

Marcel Boyer (Contact Author)

CIRANO, Université de Monréal ( email )

1400-1130 Sharbrooke St. West
Montreal, Quebec H3A 2M8
514 985-4000 (Phone)
514-985-4039 (Fax)

HOME PAGE: http://www.cirano.qc.ca/~boyerm

Armel Jacques

Université de la Réunion ( email )

Campus du Moufia
15, avenue Rene Cassin BP 7151 -97 715
Saint-Denis messag cedex 9

Michel Moreaux

Institut Universitaire de France ( email )

103, bld Saint-Michel
75005 Paris

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