Theories of investment suggest that the option value of waiting to invest is significant in many branches of economics, where investment is irreversible. The existing literature has generally failed to account for the general equilibrium feedback effects of lumpy investments on optimal...

We develop a general equilibrium model of a production economy which has a risky production technology as well as a growth option to expand the scale of the productive sector of the economy. We show that when confronted with growth options, the representative consumer may sharply alter...

Investment is often irreversible, especially at the aggregate level. This paper proposes and solves a general equilibrium model of technology adotpion when investment in the new technlogy is irreversible. In contrast to prior research, we consider a setup where the returns on technology adoption...

We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that...

We study the implications of credit market frictions for the dynamics of corporate capital structure and the risk of default of corporations. To do so, we develop a dynamic capital structure model in which firms face uncertainty regarding their ability to raise funds in credit markets and have...

This paper examines the impact of capital gains taxation on firms’ investment and financing decisions. We develop a real options model in which the timing of investment, the decision to default, and the firm’s capital structure are endogenouslyand jointly determined. Our analysis shows that...

This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are...

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 managerstockholder conflicts. In particular we consider a...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However in most situations, corporate executives face incomplete markets either because they receive compensation packages...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. Although the assumptions of risk neutrality or market completeness are crucial to the implications of the approach, they...