An extension of Merton’s (1974) model (EMM) taking account of the firm’s payments and generating a new statistical distribution for the firm value is suggested. In an open log-value space, this distribution evolves from the initially normal to negatively skewed one. When payments are zero or...

We examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs. Higher capacity, ceteris paribus, increases operating leverage and default probability, but lowers ex post adjustment costs and...