In this paper we examine an optimal investment policy of the firm, which is financed by issuing equity and debt during a period of time, using real options framework. We examine the effects of the maturity of investment on the values of equity, debt, firm, tax shield and bankruptcy cost. Specifically, we show that the investment timing depends not only on the investment threshold but also on th...

The joint determination of capital structure and investment risk is examined. Optimal capital structure re ects both the tax advantages of debt less default costs (Modigliani-Miller), and the agency costs resulting from asset substitution (Jensen-Meckling). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is relatively small for the range of envi...

Despite many past papers concerning a …rm’s capital structure, the valuation of debt and equity and cost of capital, there are few that explicitly codify contingent sharing rules for the …rm’s cash‡ow over time. We motivate equity and debt valuation by modeling tax and distress costs using cap and ‡oor technology as well as a default option at maturity. This approach sheds light on theoretical ...

Our study of 267 U.S. firms shows that improved environmental risk management is associated with a lower cost of capital. Our findings provide an alternative perspective on the environmentaleconomic performance relationship, which has been dominated by the view that improvements in economic performance stem from better resource utilization. Firms also benefit from improved environmental risk ma...

We analyze debt choice in light of taxes and moral hazard. The model features an infinite sequence of nonzero-sum stochastic differential games between equity and debt. Closed-form expressions are derived for all contingent-claims. If equity can increase volatility without reducing asset drift, callable bonds with call premia are optimal. Although callable bonds induce risk shifting, call premi...

This paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent fluctuations in aggregate GDP, investment, and interest rates. Reducing inequality of access may be a necessary condition for macroeconomic stabilization. Moreover, countercyclica...

During the 2008 financial crisis, general municipalities' across the United States began considering bankruptcy as a means for resolving systemic budget crises. This signified a substantial shift in the relationship between municipalities and Chapter 9 of the federal bankruptcy code. Until 2008, few general municipalities filed under Chapter 9. Special utility districts filed most Chapter 9 pet...

This paper describes a simple way to integrate the debt tax shield into an accounting-based valuation model. The market value of equity is determined by forecasting residual operating income, which is calculated by charging operating income for the operating assets at a required return that accounts for the tax benefit that comes from borrowing to raise cash for the operations. The model assume...

We apply theories of capital market failure to analyze optimal financing of risky higher education. In the market solution, students can only finance their education through debt. There is underinvestment in human capital, because some students with socially profitable investments in human capital will not invest in education due to adverse selection problems in debt markets and because insuran...

It has been long recognized that endogenous default probabilities cannot explain spreads between corporate and the riskless bonds. Recently, this issue has been subjected to rigorous scrutiny. Previous studies have found that for investment-grade debt, structural models explain only 15-25% of the observed spreads. On the other hand, for the high-yield debt, the structural models exaggerate actu...