If debt capacity is defined as the incremental debt that is optimally associated with an additional asset, then the debt capacity of growth options is negative. Underinvestment costs of debt increase and free cash flow benefits of debt fall with additional growth options. Thus, if firm value...

This paper analyzes the relation between agency conflicts and risk management in a contingent claims model of the firm. In contrast to previous contributions, our analysis incorporates not only stockholder-debtholder conflicts but also manager--stockholder conflicts. We show that the costs of...

This paper analyses interactions among investment policy, financial policies, and the market for corporate control. Both hedging and financing policies affect a firm's investment policy, thus changing costs of over- and under-investment. Both policies allow management to offer credible promises...

This paper analyzes the interaction among investment, financing and hedging policies in a model where managers derive perquisites from investment. In our model, both hedging and financing policies affect a firm's investment policy, thus changing costs of over- and underinvestment. The paper...

We relate the value of growth options in the firm's investment opportunity set to the level of debt in the firm's capital structure. Underinestment costs of debt increase and free cash flow benefits fall with additional growth options. Thus, if debt capacity is defined as the amount of debt the...