Investment options with debt-financing constraints

Nicos Koussis and Spiros H. Martzoukos

The European Journal of Finance, 2012, vol. 18, issue 7, 619-637

Abstract: A contingent claims model is used to study the impact of debt-financing constraints on firm value, optimal capital structure, the timing of investment and other variables, such as credit spreads. The optimal investment trigger follows a U shape as a function of exogenously imposed constraint. Risky, equity-financed R&D growth options increase firm value by increasing the option value on unlevered assets, while their impact on the net benefits of debt is small.

Date: 2012
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DOI: 10.1080/1351847X.2011.603347

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