We propose a model that jointly determines the capital structure and investment decisions taking business cycle and debt maturity into account. Namely, the firm can switch the diffusion regime of asset value, which involves switching costs, and the state of the economy that generates cyclical...

We propose a model of a firm's reversible investment decision with macroeconomic conditions based on optimal switching of a diffusion process. The switching costs of a diffusion regime and the cash flow generated by the firm depend on a business cycle which alternates via a Markov chain, and the...