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

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Abstract

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.

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  1. R. Jarrow

    Present address: Kamakura Corporation, 2222 Kalakaua Ave., Suite 1400, Honolulu, HI, 96815, USA

Authors and Affiliations

  1. Johnson Graduate School of Management, Cornell University, Ithaca, NY, 14853, USA

    R. Jarrow

  2. University of Michigan Business School, Ann Arbor, MI, 48109, USA

    A. Purnanandam

Authors
  1. R. Jarrow
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  2. A. Purnanandam
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Correspondence to R. Jarrow.

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Jarrow, R., Purnanandam, A. The valuation of a firm’s investment opportunities: a reduced form credit risk perspective. Rev Deriv Res 10, 39–58 (2007). https://doi.org/10.1007/s11147-007-9012-8

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  • DOI: https://doi.org/10.1007/s11147-007-9012-8

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