Irreversible Investment, Financing, and Bankruptcy Decisions in an Oligopoly

Jyh-bang Jou and Tan Lee

Journal of Financial and Quantitative Analysis, 2008, vol. 43, issue 3, 769-786

Abstract: This paper examines a firm's debt level, investment timing, and investment scale choices in a continuous-time model where the output price of a good that the firm produces depends on a stochastic demand-shift variable and the total industry supply of the good. Using the simple symmetric Cournot-Nash equilibrium assumption that all firms are identical and therefore follow the same financing and investment strategies, we show that competition decreases the output price and hence encourages a firm to wait for a higher demand level before it is profitable to invest. We also demonstrate how uncertainty, bankruptcy costs, and corporate taxation affect the firm's financing and investment decisions.

Date: 2008
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