Investment timing under debt issuance constraint

2017

Manage Decis Econ

Self Cite

We develop a real options model for evaluating and optimizing a research and development (R&D) project. The model captures key features of R&D, including research duration, growth opportunity, debt financing, and uncertainty of technology, demand market, and rival preemption. In the model, we unveil the interactions of key R&D features. The effect of duration on investment depends on whether there is rival preemption. Higher uncertainty of research duration speeds up investment in the presence of rival preemption. Higher uncertainty of technological success, combined with a growth opportunity, accelerates investment. Debt financing greatly decreases time lag between the first stage project and growth project.

Section: Numerical Analysis and Implicationssupporting

confidence: 92%

mentioning

confidence: 99%

Valuation of R&D investment under technological, market, and rival preemption uncertainty

2017

Manage Decis Econ

Self Cite

“…Hirth and Uhrig-Homburg (2010b) extended Boyle and Guthrie (2003) to a case involving financing costs and showed the possibility of a variety of relations. Shibata and Nishihara (2012) showed that, in a dynamic investment and capital structure model, investment thresholds have a U-shaped relation with a debt issuance constraint.…”

Section: Case With Fixed and Proportional Costsmentioning

confidence: 99%

“…2. For example, the literature examined the effects of liquidity constraints (Boyle & Guthrie, 2003), shareholder -debtholder conflicts (Mauer & Sarkar, 2005;Sundaresan & Wang, 2007), asymmetric information (Grenadier & Malenko, 2011;Morellec & Schürhoff, 2011;, and debt capacities (Shibata & Nishihara, 2012). 3.…”

Section: Notesmentioning

confidence: 99%

Investment timing with fixed and proportional costs of external financing

International Journal of Management Science and Engineering Man

Sawada

2014

Self Cite

We develop a dynamic model in which a firm exercises an option to expand production with a cash balance and costly external funds. By proving the properties of the option exercise regions, we reveal how the firm's financing and investment policy depends on its cash flow and balance. In the presence of only a proportional cost of external financing, the firm with more cash balance invests earlier; however, the presence of both proportional and fixed costs leads to a non-monotonic relation between the investment time and the cash balance. The firm with more cash balance invests later to save a fixed cost, particularly when the cash balance is close to the investment cost. Our results can potentially account for a variety of empirical results concerning the relation between investment and internal funds.

“…The other is debt financing constraints, or difficulty in accessing debt financing. For instance, Shibata and Nishihara (2012) consider a firm facing a debt issuance constraint, and Nishihara and Shibata (2013) examine the effects of financing costs on investment timing.…”

mentioning

confidence: 99%

Preemption, leverage, and financing constraints

Sawada

2013

Rev Financ Econ

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This paper investigates the interactions between preemptive competition and leverage in a duopoly market. We investigate both a case in which the firms have optimal financial structures, and a case in which financing constraints require firms to finance their investments by debt. Our findings are that the second mover always leaves the duopoly market before the leader, although the leader may exit before the follower's entry. The leverage effects of debt financing can increase the value of a firm and accelerate investment, even in the presence of preemptive competition. Notably, financing constraints can delay preemptive investment and improve firm values in preemptive equilibrium. Indeed, the leader's high leverage due to financing constraints can lower the first‐mover advantage and weaken preemptive competition. Especially with strong first‐mover advantage, the financing constraint effects can dominate the leverage effects. These findings are almost consistent with the empirical evidence, which shows that high leverage leads to competitive disadvantage and mitigates product market competition.