Irreversible investment, financing, and bankruptcy decisions in an oligopoly
Journal
Journal of Financial and Quantitative Analysis
Journal Volume
43
Journal Issue
3
Pages
769-786
Date Issued
2008
Author(s)
Abstract
Abstract This paper examines a firm's debt level, investment timing, and investment scale choices in a continuous-time model where the output price of a good that the firm produces depends on a stochastic demand-shift variable and the total industry supply of the good. Using the simple symmetric Cournot-Nash equilibrium assumption that all firms are identical and therefore follow the same financing and investment strategies, we show that competition decreases the output price and hence encourages a firm to wait for a higher demand level before it is profitable to invest. We also demonstrate how uncertainty, bankruptcy costs, and corporate taxation affect the firm's financing and investment decisions.
Type
journal article
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