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Dynamic Models of Investment Distortions

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Abstract

This paper studies the interaction between corporate financing decisions and investment decisions in a dynamic framework. When the production decision involves an expansion option, the firm trades off tax benefits of debt against two costs of debt financing, namely the investment distortion related to exercise of the expansion option and the loss of a valuable expansion opportunity if the firm defaults. The optimal capital structure is all equity for firms with more value in growth options (or intangible assets) and tends to involve debt financing for firms with more value in tangible assets.

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Author information

Authors and Affiliations

  1. Department of Finance, Ling Tung College, Taiwan

    Shih-Chuan Tsai (Visiting Faculty)

  2. School of Management, Zhechiang University, China

    Shih-Chuan Tsai (Visiting Faculty)

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  1. Shih-Chuan Tsai
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Correspondence to Shih-Chuan Tsai.

Additional information

JEL Classification: D81, G13, G31, G32

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Tsai, SC. Dynamic Models of Investment Distortions. Rev Quant Finan Acc 25, 357–381 (2005). https://doi.org/10.1007/s11156-005-5460-0

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  • DOI: https://doi.org/10.1007/s11156-005-5460-0

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