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The Effects of Risky Debt on Investment Under Uncertainty
Author(s) -
You Seung Dong
Publication year - 2013
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12008
Subject(s) - disinvestment , debt , investment (military) , monetary economics , economics , finance , investment decisions , business , microeconomics , behavioral economics , incentive , politics , political science , law
Abstract This paper investigates investment and disinvestment decisions when an investor finances debt to fund the lump‐sum cost at the time of investment. The study examines investment timing decisions in a frictionless financial market. By extending the model presented in Dixit (1989), this paper argues that, as risky debt increases, an investor's trigger price for investment decreases while the trigger price for disinvestment increases. Such an investor hastens both investment and disinvestment decisions with risky debt. This paper focuses on stand‐alone financing rather than expansion financing, as in Lyandres and Zhdanov (2010).