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Investment and financing decisions in the presence of time-to-build

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  • Jeon, Haejun

Abstract

We study a firm’s optimal decisions on investment, default, and financing when the amount of time and the running costs for project completion are uncertain. In the presence of time-to-build, a firm makes conservative investment and financing decisions; investment is delayed, and the optimal leverage ratio is inverted U-shaped with respect to the size of the lag. Although equity holders can choose to default before the project has been completed, the default probability in the presence of time-to-build is lower than that in the absence of a lag in most cases because of the conservative investment and financing decisions. Given the lower default probability, equity holders may benefit more from debt financing in the presence of time-to-build than they would in the absence of a lag. When firms can shorten their expected time-to-build by bearing more costs, unlevered firms strive to reduce the lag more than optimally levered firms do. However, highly levered firms utilize more resources to reduce the lag than all-equity firms do because equity holders are more concerned about the possibility of default before the project’s completion.

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  • Jeon, Haejun, 2021. "Investment and financing decisions in the presence of time-to-build," European Journal of Operational Research, Elsevier, vol. 288(3), pages 1068-1084.
    • Handle: RePEc:eee:ejores:v:288:y:2021:i:3:p:1068-1084
    DOI: 10.1016/j.ejor.2020.06.034
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    Cited by:

    1. Jeon, Haejun, 2021. "Investment timing and capacity decisions with time-to-build in a duopoly market," Journal of Economic Dynamics and Control, Elsevier, vol. 122(C).
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    3. Johari, Maryam & Hosseini-Motlagh, Seyyed-Mahdi, 2022. "Evolutionary behaviors regarding pricing and payment-convenience strategies with uncertain risk," European Journal of Operational Research, Elsevier, vol. 297(2), pages 600-614.
    4. Haejun Jeon, 2023. "Time-to-build and capacity expansion," Annals of Operations Research, Springer, vol. 328(2), pages 1461-1494, September.

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