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Irreversible Investment, Financing, and Bankruptcy Decisions in an Oligopoly

Published online by Cambridge University Press:  06 April 2009

Jyh-bang Jou  and
Tan Lee
Jyh-bang Jou
Affiliation:
[email protected], Department of Economics and Finance, Massey University (Albany Campus), Auckland, New Zealand and Graduate Institute of National Development, National Taiwan University, No. 1 Roosevelt Rd. Sec. 4, Taipei 106, Taiwan, R.O.C.
Tan Lee
Affiliation:
[email protected], Department of Finance, Auckland University of Technology, Auckland, New Zealand and Department of International Business, Yuan Ze University, 135 Yuan-Tung Rd., Chung-Li, Taoyuan 320, Taiwan, R.O.C.
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Abstract

This paper examines a firm's debt level, investment timing, and investment scale choices in a continuous-time model where the output price of a good that the firm produces depends on a stochastic demand-shift variable and the total industry supply of the good. Using the simple symmetric Cournot-Nash equilibrium assumption that all firms are identical and therefore follow the same financing and investment strategies, we show that competition decreases the output price and hence encourages a firm to wait for a higher demand level before it is profitable to invest. We also demonstrate how uncertainty, bankruptcy costs, and corporate taxation affect the firm's financing and investment decisions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 3 , September 2008 , pp. 769 - 786
Copyright
Copyright © School of Business Administration, University of Washington 2008

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