Debt Maturity Choices, Multi-stage Investments and Financing Constraints

Agliardi, Elettra ; Koussis, Nicos (2014) Debt Maturity Choices, Multi-stage Investments and Financing Constraints. Bologna: Dipartimento di Scienze economiche DSE, p. 42. DOI 10.6092/unibo/amsacta/4112. In: Quaderni - Working Paper DSE (980). ISSN 2282-6483.
Full text available as:
[img]
Preview
PDF
License: Creative Commons Attribution Non-commercial

Download (531kB) | Preview

Abstract

We develop a dynamic investment options framework with optimal capital structure and analyze the effect of debt maturity. We find that in the absence of financing constraints short-term debt maximizes firm value. In contrast with most literature results, in the absence of constraints, higher volatility may increase initial debt for firms with low initial revenues, issuing long term debt that expires after the investment option maturity. This effect, which is due to the option value of receiving the value of assets and remaining tax savings, does not hold for short term debt and firms with high profitability, where an increase in volatility reduces the firm value. The importance of short-term debt is reduced in the presence of non-negative equity net worth or debt financing constraints and firms behave more conservatively in the use of initial debt. With non-negative equity net worth, higher volatility has adverse effects on the firm value, while with debt financing constraints higher volatility may enhance firm value for firms with relatively low revenue that have out-of-the-money investment options.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Agliardi, Elettra
Koussis, Nicos
Keywords
optimal capital structure, financing constraints, binomial lattice models, real options
Subjects
ISSN
2282-6483
DOI
Deposit date
19 Nov 2014 09:53
Last modified
16 Mar 2015 14:08
URI

Other metadata

Downloads

Downloads

Staff only: View the document

^