Investment Options With Debt Financing Constraints

50 Pages Posted: 20 Mar 2007 Last revised: 9 Mar 2008

See all articles by Nicos Koussis

Nicos Koussis

University of Cyprus

Spiros Martzoukos

University of Cyprus - Department of Public and Business Administration; George Washington University - School of Business

Date Written: February 2008

Abstract

We use a contingent claims model to study the impact of debt financing constraints on firm value, optimal capital structure, the timing of investment and other variables like the credit spreads. The optimal investment trigger follows a U-shape as a function of the constraint. Equity financed risky growth options (e.g. R&D or experimentation) reduce the impact of debt constraints and increase firm value by increasing the option value on unlevered assets. Growth options have a small impact on the expected net benefits of debt. We also investigate the effect of debt financing constraints on government taxes and social welfare.

Keywords: Capital Structure, Financing Constraints, Endogenous Default, Real Options, Growth Options

JEL Classification: G31, G13

Suggested Citation

Koussis, Nicos and Martzoukos, Spiros Harilaos Spiridon, Investment Options With Debt Financing Constraints (February 2008). Available at SSRN: https://ssrn.com/abstract=972673 or http://dx.doi.org/10.2139/ssrn.972673

Nicos Koussis (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
+357-22892474 (Phone)
+357-22892460 (Fax)

Spiros Harilaos Spiridon Martzoukos

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
357-2-892474 (Phone)
357-2-892460 (Fax)

George Washington University - School of Business

Washington, DC 20052
United States
202-994-5996 (Phone)
202-994-5014 (Fax)

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