The valuation of a firm’s investment opportunities: a reduced form credit risk perspective |
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| Authors: | R Jarrow A Purnanandam |
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| Institution: | (1) Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, USA;(2) Present address: Kamakura Corporation, 2222 Kalakaua Ave., Suite 1400, Honolulu, HI 96815, USA;(3) University of Michigan Business School, Ann Arbor, MI 48109, USA |
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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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| Keywords: | Present value Credit risk Reduced form models |
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