Entry,financing, and bankruptcy decisions: The limited liability effect |
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| Affiliation: | 1. Caltech HSS, 228-77 Caltech, Pasadena, CA 91125 USA;2. INRA-Paris School of Economics, 48, Boulevard Jourdan, 75014 Paris France;1. Beijing Normal University Hong Kong Baptist University, United International College, 2000 Jintong Road, Tangjiawa, Zhuhai, Guangdong, China;2. Purdue University, Department of Economics, Krannert School of Management, 403 West State Street, West Lafayette, IN 47907-2056, United States;3. CESifo, Poschingerstr. 5, Munich 81679, Germany |
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| Abstract: | A firm, which has a privileged right to undertake an irreversible investment project, simultaneously determines whether to exercise this project and also how many bonds to issue in the presence of demand uncertainty. The firm will not exercise the project until its net value from investing immediately equals its option value from delaying investment. The firm’s choice of debt levels balances the tax advantage of debt against a cost associated with the event of bankruptcy. The effects of uncertainty, asset specificity, and the costs to purchase capital later on a firm’s entry, financing, and bankruptcy decisions are examined and compared with those in the literature. |
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