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We develop an investment and financing model in which two identical firms compete for first-mover advantage in an opportunity to invest. We investigate the interactions between preemptive competition and a financing constraint. We show that a medium-intensity financing constraint can play a positive role in mitigating the preemptive competition and improving firm value in equilibrium. This positive effect is in sharp contrast with the conventional negative effects of the financing constraint. The positive effect is strong, especially for IT venture businesses because of the following characteristics: severe preemptive competition, a lack of internal funds, high uncertainty regarding future project value, and high bankruptcy costs.

We develop a dynamic model in which a distressed firm optimizes the bankruptcy choice and its timing. When the distressed firm's shareholders sell the assets, they are better informed about the asset value than outsiders are. We show that this asymmetric information can delay the asset sales to signal asset quality to outsiders. More debt and lower asset value can reduce the signaling cost and mitigate the asset sales delay. Notably, we show that the firm changes the bankruptcy choice from selling out to liquidation bankruptcy when the signaling cost associated with selling out is high. This distortion in the bankruptcy choice greatly lowers the debt value, whereas it has a weak impact on the equity value.

We consider a dynamic model in which shareholders delegate a manager, who observes private information about running and liquidation costs of the firm, to operate the firm. We analytically derive the shareholders' optimal contract contingent on the cost structure of the firm. The information asymmetries change the high-cost firm's default and liquidation timing. Even if the liquidation value is higher than the face value of debt, the shareholders of the high-cost firm, unlike in the symmetric information case, can choose default rather than liquidation in order to reduce the information rent to the manager. The information asymmetries accelerate negative liquidation and delay positive liquidation, while they accelerate default. Although the information asymmetries decrease the equity and firm values, they may increase the debt value. The optimal leverage ratio of the asymmetric information case becomes higher than that of the symmetric information case because more debt mitigates the loss due to the information asymmetries. Our results can potentially account for many empirical findings.

This paper investigates the decision of an automaker concerning the alternative promotion of a hybrid vehicle (HV) and a full electric vehicle (EV). We evaluate the HV project by considering the option to change promotion from the HV to the EV in the future. The results not only extend previous findings concerning American options on multiple assets, but also include several new implications. One notable observation is that the increased market demand for EVs can accelerate the promotion of the HV because of the embedded option.JEL Classifications Code: C61, G13, G31, O32.

This paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether to proceed to debt restructuring or direct liquidation at an arbitrary time. In the model, we show the following results. Fewer asset sales, lower financing, debt renegotiation, and running costs, a lower premium to the debt holders, a lower cash flow volatility, and a higher initial coupon increase the shareholders' incentive to choose debt restructuring to avoid full liquidation. In the debt renegotiation process, the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders. The timing of debt restructuring always coincides with that of liquidation without debt renegotiation. Most notably, the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs. The possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure.

Using a contingent claims model, we examine the impacts of both operating leverage and financial leverage on a firm's investment decisions in the context of capacity expansion. Our model shows that quasi-fixed operating costs could significantly mitigate the underinvestment problem for debt-financed firms. The existing debt induces equity holders to delay equity-financed expansion because the expanded earnings base will also benefit the debt holders by lowering the bankruptcy risk. The operating costs decrease this type of wealth transfer from equity holders to debt holders by magnifying the bankruptcy risk of the existing debt upon investment. By applying the Cox proportional hazard model on a large sample of publicly traded U.S. firms over 1966-2016, we offer empirical support for the theoretical predictions. The results are robust to various measures of operating leverage.