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Dynamic Models of Investment Distortions

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  • Shih-Chuan Tsai

Abstract

This paper studies the interaction between corporate financing decisions and investment decisions in a dynamic framework. When the production decision involves an expansion option, the firm trades off tax benefits of debt against two costs of debt financing, namely the investment distortion related to exercise of the expansion option and the loss of a valuable expansion opportunity if the firm defaults. The optimal capital structure is all equity for firms with more value in growth options (or intangible assets) and tends to involve debt financing for firms with more value in tangible assets. Copyright Springer Science + Business Media, Inc. 2005

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  • Shih-Chuan Tsai, 2005. "Dynamic Models of Investment Distortions," Review of Quantitative Finance and Accounting, Springer, vol. 25(4), pages 357-381, December.
    • Handle: RePEc:kap:rqfnac:v:25:y:2005:i:4:p:357-381
    DOI: 10.1007/s11156-005-5460-0
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    Cited by:

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    2. Schulte, Reinhard, 2018. "New venture investing trajectories: A large scale longitudinal study," Lüneburger Beiträge zur Gründungsforschung 13, Leuphana University of Lüneburg, Department of Entrepreneurship & Start-up Management.
    3. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    4. Djaoudath Alidou, 2012. "Employees Equity Issue and Asymmetric Information:Evidence from France - Augmentations de capital réservées aux salariés et Asymétrie d’information:Cas de la France," Working Papers CREGO 1120901, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    5. Tao Shen, 2017. "Credit spreads and investment opportunities," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 117-152, January.
    6. Shu Feng & Chun-Yu Ho, 2016. "The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 835-856, October.
    7. Sudipto Sarkar & Chuanqian Zhang, 2016. "Loan-commitment borrowing and performance-sensitive debt," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 973-986, November.

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