Investment Game with Debt Financing

Michi Nishihara and Takashi Shibata ()
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Michi Nishihara: Graduate School of Economics, Osaka University, Japan

Chapter 9 in Recent Advances in Financial Engineering, 2009, pp 161-187 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper investigates firm values and investment strategies (investment, coupon, and default timing) when several firms make strategic real investments with debt financing. We derive and compare the equilibrium investment strategies in three types of duopolies: (i) two symmetric firms, both of which can issue debt, (ii) two symmetric firms, only one of which (the leader) can issue debt, and (iii) a levered firm versus an unlevered firm. We show that in (iii) and in equilibrium, the levered firm always invests prior to the unlevered firm. Further, we derive the equilibrium in a oligopoly of n levered firms, and show that social loss increases as the number of the firms, n, becomes larger.

Keywords: Financial Engineering; Mathematical Finance; Real Options; Credit Risk; Option Pricing; Transaction Cost; Market Microstructure (search for similar items in EconPapers)
Date: 2009
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