Review of Derivatives Research

, Volume 10, Issue 1, pp 39–58

The valuation of a firm’s investment opportunities: a reduced form credit risk perspective


DOI: 10.1007/s11147-007-9012-8

Cite this article as:
Jarrow, R. & Purnanandam, A. Rev Deriv Res (2007) 10: 39. doi:10.1007/s11147-007-9012-8


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.


Present valueCredit riskReduced form models

JEL Classifications


Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Johnson Graduate School of ManagementCornell UniversityIthacaUSA
  2. 2.Kamakura CorporationHonoluluUSA
  3. 3.University of Michigan Business SchoolAnn ArborUSA