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Investment Game with Debt Financing

In: Recent Advances In Financial Engineering

Author

Listed:
  • Michi Nishihara

    (Graduate School of Economics, Osaka University, Japan)

  • Takashi Shibata

    (Graduate School of Social Sciences, Tokyo Metropolitan University, Japan)

Abstract

This paper investigates firm values and investment strategies (investment, coupon, and default timing) when several firms make strategic real investments with debt financing. We derive and compare the equilibrium investment strategies in three types of duopolies: (i) two symmetric firms, both of which can issue debt, (ii) two symmetric firms, only one of which (the leader) can issue debt, and (iii) a levered firm versus an unlevered firm. We show that in (iii) and in equilibrium, the levered firm always invests prior to the unlevered firm. Further, we derive the equilibrium in a oligopoly of n levered firms, and show that social loss increases as the number of the firms, n, becomes larger.

Suggested Citation

  • Michi Nishihara & Takashi Shibata, 2009. "Investment Game with Debt Financing," World Scientific Book Chapters, in: Masaaki Kijima & Masahiko Egami & Kei-ichi Tanaka & Yukio Muromachi (ed.), Recent Advances In Financial Engineering, chapter 9, pages 161-187, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814273473_0009
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    Citations

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    Cited by:

    1. Tetsuya Yamada, 2010. "Accelerated Investment and Credit Risk under a Low Interest Rate Environment: A Real Options Approach," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 28, pages 181-214, November.
    2. Belle Selene Xia, 2014. "HiQ International Company: A Case Study of Operational Effectiveness post Merger and Acquisition," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 5(2), pages 60-70, March.
    3. Tetsuya Yamada, 2010. "Accelerated Investment and Credit Risk under a Low Interest Rate Environment: A Real Options Approach," IMES Discussion Paper Series 10-E-08, Institute for Monetary and Economic Studies, Bank of Japan.

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