The valuation of a firm’s investment opportunities: a reduced form credit risk perspective
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- Jarrow, R. & Purnanandam, A. Rev Deriv Res (2007) 10: 39. doi:10.1007/s11147-007-9012-8
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This paper develops a valuation model for a firm’s investment opportunities. Given standard market imperfections, we show that maximizing the firm’s equity value is consistent with the need to include a capital charge for an investment specific to a firm’s capital structure and in excess of the investment’s market determined risk. A reduced form credit risk perspective is taken to enable a continuous time implementation. This continuous time implementation is illustrated within the paper.