On the Interaction of Real and Financial Decisions of the Firm Under Uncertainty

On the neutrality of debt in investment intensity

“…However, when market imperfections such as corporate taxes, bankruptcy costs, and agency conflicts are introduced, the extant literature by and large establishes a linkage between corporate financing and investment decisions such that they are no longer separable (see, e.g., Dotan and Ravid 1985;Dammon and Senbet 1988;Mauer and Triantis 1994;Childs et al 2005;Décamps and Djembissi 2007). In this paper, we use a real options approach to examine how debt financing affects a firm's investment decisions in general and its investment intensity in particular, where optimal leverage is determined within a standard trade-off model of capital structure à la Leland (1994) and Goldstein et al (2001).…”

Estimating product market competition: Methodology and application

“…See alsoBolton and Scharfstein (1990),Dotan and Ravid (1985),Hart (1983),Maksimovic (1988),Ravid (1988),and Scharfstein (1988).2 The exceptions areClayton and Ravid (2002),Chevalier (1995),Kovenock and Philips (1997),Phillips (1995),Ryan and Wiggins (2002) andSundaram et al (1996).…”

When are preferred shares preferred? Theory and empirical evidence

“…The firm receives a stochastic operating income distributed over the support (0, ∞), and then divides up cash flows according to strict seniority rules. Similar to several other papers (see, for example, Kraus and Litzenberger, 1973;Dotan and Ravid, 1985), it is assumed that upon bankruptcy, a fixed bankruptcy cost, B, is incurred. We further assume, for simplicity sake, that both debt and preferred stock are issued at par, and all market value adjustments are made through the promised rate of interest.…”