Investment Options with Debt Financing and Differential Beliefs
نویسندگان
چکیده
A contingent claims model with differential beliefs between debt and equity holders about the asset’s growth rate and volatility is used to study the impact of differential information between debt and equity holders on firm value, optimal capital structure, the timing of investment and other variables such as the credit spreads. The model explains the existence of debt constraints when debt holders have unfavorable beliefs about the volatility or the growth prospects of the firm. Within this framework, equity holders’ volatility choice prior and after the exercise of the investment option is also analyzed which is affected by the stickyness of debt holders beliefs.
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