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



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 value Credit risk Reduced form models 

JEL Classifications

G31 G13 


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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

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