On the neutrality of debt in investment intensity

Wong, Kit Pong

doi:10.1007/s10436-009-0137-7

Cited by 23 publications

(9 citation statements)

References 40 publications

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“…In addition, higher uncertainty diminishes the bank loans even more for the firms that are likely to be more creditworthy and financially unconstrained: lower leveraged and large firms, and firms with the lower credit line drawdown ratio. These results are consistent with the implications of the real options literature as in Boyle and Guthrie (2003) and Wong (2010). With bank specific supply shocks controlled for, we cannot find sufficient evidence of the strong financial channel through which uncertainty affects bank loans.…”

Section: ⅰ Introductionsupporting

confidence: 82%

Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

2019

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This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the negative effect of uncertainty on bank loans. In addition, we find that the negative effect is stronger for relatively larger firms or financially unconstrained firms with low leverage or financial slack, once credit supply is controlled for. We confirm the same results in the analysis of firm investment, suggesting that high uncertainty may transmit to investment and bank loans mainly through the real options effects.

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Section: ⅰ Introductionsupporting

confidence: 82%

Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

2019

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“…The second term captures the tax advantage to debt, net of the loss in value due to the dissipation of intellectual capital upon default (see Goldstein et al 2001, Wong 2010). …”

Section: Solution To the Modelmentioning

confidence: 99%

“…This is referred to as the scaling property in the real options literature on capital structure (see, e.g.,Goldstein et al 2001, Strebulaev 2007, Tserlukevich 2008, Wong 2010). Downloaded from informs.org by [132.239.1.231] on 20 August 2015, at 06:25 .…”

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confidence: 97%

Intellectual Capital and Financing Decisions: Evidence from the U.S. Patent Data

Liu

Wong

2011

Management Science

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T his paper develops a real options model to understand two distinct roles played by intellectual capital in corporate financing decisions. Whereas limiting a firm's debt capacity because of its low liquidation value, intellectual capital enhances a firm's debt capacity through its positive impact on earnings. Our model shows that the former dominates or is dominated by the latter, depending on whether the rate of dissipation of intellectual capital upon default is larger or smaller than a critical level, respectively. Using patent-based and research-and-development-based variables as proxies for intellectual capital, we find robust evidence that the relation between intellectual capital and leverage is positive. Specifically, a one-standard-deviation increase in the level of a firm's intellectual capital is associated with an increase of 6.6% to 21.1% in its market leverage. We further find this positive relation to be stronger for biotechnology firms.

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“…8 8 In the special case that the operating cost of investment intensity is absent, i.e., C = 0, the optimal investment intensity is invariant to the degree of irreversibility (Wong, 2010a) and to the amount of debt financing (Wong, 2010b). This neutrality result also holds in our model, as is evident from and () when C = 0. …”

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confidence: 99%

The Effects of Abandonment Options on Investment Timing and Intensity

Wong

2011

Bulletin of Econ Res

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This paper examines how the presence of an abandonment option affects the timing and intensity of a firm's investment. We develop a continuous-time model wherein a firm is endowed with a perpetual option to invest in a project at any time by incurring an investment cost at that instant. The amount of the investment cost is directly related to the intensity of investment that is endogenously chosen by the firm at the investment instant. The project generates a stream of stochastic revenue flows with a concomitant stream of constant cost flows, both of which increase with the investment intensity. We show that allowing the firm to make an irreversible decision to abandon the project does not affect the firm's optimal investment intensity if the investment cost is totally reversible. Otherwise, the option to abandon the project induces the firm to choose a lower level of investment intensity. Furthermore, we show that the presence of the abandonment option pushes down the firm's optimal investment trigger, thereby hastening the undertaking of the project.

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On the neutrality of debt in investment intensity

Abstract: Capital structure, Investment intensity, Investment timing, Real options, G31, G32, G33,

Cited by 23 publications

References 40 publications

Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

Intellectual Capital and Financing Decisions: Evidence from the U.S. Patent Data

The Effects of Abandonment Options on Investment Timing and Intensity

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