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Investment and financing for cash flow discounted with group diversity

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  • Pengfei Luo
  • Zhaojun Yang

Abstract

We consider a firm's investment and financing decisions made by a group of agents on behalf of shareholders, of which each individual utilizes a different discount rate following a given probability distribution for the valuation of equity. We measure group diversity by the variance of the distribution. The price of debt is determined by an equilibrium method in a competitive market. We show that a greater group diversity increases the project value, accelerates investment and postpones default. The value of the investment option increases but the optimal leverage decrease with the group diversity. The inefficiency from asset substitution increases but that from debt overhang decreases with the group diversity. Our predictions are documented by empirical evidences.

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  • Pengfei Luo & Zhaojun Yang, 2021. "Investment and financing for cash flow discounted with group diversity," International Review of Finance, International Review of Finance Ltd., vol. 21(3), pages 769-785, September.
    • Handle: RePEc:bla:irvfin:v:21:y:2021:i:3:p:769-785
    DOI: 10.1111/irfi.12295
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    1. Michi Nishihara, 2021. "Preemptive competition between two firms with different discount rates," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 675-687, April.

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