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Investment-based asset pricing research highlights the role of irreversibility as a determinant of firms' risk and … flexibility (i.e., contraction and expansion options) is to determine the relation between risk and operating leverage: risk … these characteristics in stock returns and risk …
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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...
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