Investment and Financial Decisions under Uncertainty and Exogenous Borrowing Rate
نویسندگان
چکیده
A competitive firm which chooses the timing of investment and optimal volume of debt is considered. The price of the firm’s output follows the geometric Brownian motion or more general jump-diffusion processes, and the firm takes an arbitrage free borrowing rate as given. The optimal timing of investment and volume of debt is computed, and it is shown that if the borrowing rate is close to the riskless rate in an explicitly specified sense then the optimal volume of debt borrowed to finance the capital expansion is small relatively to the volume of investment. This result agrees with empirical observation on the investment and financing decisions of firms with good investment opportunities.
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