We introduce ambiguity about assets' value dynamics into a trade-off framework of capital structure to explain the empirically observed zero-leverage and underleverage puzzles. We utilize the decision framework of Chen and Epstein (2002) to characterize investors' ambiguity aversion. We show...

We examine a real option model with governance friction and optimal investment and financing decisions when an entrepreneur facing ambiguity considers investing in an innovation project. The novel features of our model are the introduction of jumps in the returns to innovation and investors’...