The investment decision with technological and market uncertainties

Corporate investment and financing with uncertain growth opportunities

“…Figure 2 plots optimal investment threshold with respect to arrival uncertainty λ for a range of parameter values. It is noteworthy that all curves are Ushaped and all the minimum point λ * are almost same as those of unlevered firm shown in Fan et al (2019). Thus we can conclude that the relationship between the investment threshold and arrival rate is still dominantly governed by the relative effects of growth size and cost in a nonmonotonic manner, and there is no interactive effect between debt financing and arrival uncertainty in shaping a firm's investment policy.…”

“…At the same time, we can see that the shape of investment threshold with respect to arrival uncertainty is Ushaped relationship, which is similar to that of unlevered firm (see Fan et al, 2019). However, there are a few points requiring discussion.…”

“…Secondly, the investment trigger without growth opportunity, x i (λ = 0), is lower than that with certain growth opportunity x i (λ = ∞). As we have discussed in Proposition Fan et al (2019), they should be equal without debt financing.…”

“…However, there are a few points requiring discussion. Firstly, comparing Fan et al (2019), the investment threshold for the levered firm is lower than the unlevered case for all range of λ. It is anticipated since the existence of debt makes the investment attractive henceforth lowers the investment threshold compared to that of unlevered firm (see Mauer and Sarkar, 2005).…”

“…Furthermore, they only generate results for unlevered firms. Fan, Sarkar, and Zhang (2019) examine how technological uncertainty affects initial investment decision for all-equity firms. But they focus on the comparison between sequential and leapfrog investment decision while we focus on sequential investment for levered firms.…”