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dc.contributor.authorSabarwal, Tarun
dc.date.accessioned2012-04-09T18:50:17Z
dc.date.available2012-04-09T18:50:17Z
dc.date.issued2005
dc.identifier.citationSabarwal, Tarun (2005): “The Non-Neutrality of Debt in Investment Timing: A New NPV Rule,” Annals of Finance, 1(4), 433-445. http://dx.doi.org/10.1007/s10436-005-0016-9
dc.identifier.urihttp://hdl.handle.net/1808/8861
dc.descriptionThis is the author's accepted manuscript. The original published version is available at: http://dx.doi.org/10.1007/s10436-005-0016-9.
dc.description.abstractLimited liability debt financing of irreversible investments can affect investment timing through an entrepreneur’s option value, even after compensating a lender for expected default losses. This non-neutrality of debt arises from an entrepreneur’s unique investment opportunity, and it is shown in a standard model of irreversible investment that is enhanced in a straightforward manner to include the equilibrium effect of a competitive lending sector. The analysis is partial, in that it takes as exogenously given an entrepreneur’s use of debt. Intuitively, limited liability lowers downside risk for the entrepreneur by truncating the lower tail of risks, thereby lowering the investment threshold. Compensating the lender for expected default losses reduces project profitability to the entrepreneur, thereby increasing the investment threshold. The net effect is negative, because lower downside risk has an additional impact on the option value of delaying investment. The standard NPV rule in real options theory implicitly assumes debt to be neutral. With non-neutrality of debt, an investment threshold is higher than investment cost, but lower than the standard NPV rule. Comparisons with other standard investment thresholds show similar relationships.
dc.language.isoen
dc.publisherSpringer Verlag
dc.subjectDebt
dc.subjectDefault
dc.subjectLimited liability
dc.subjectInvestment
dc.subjectNPV
dc.subjectOption value
dc.titleThe Non-Neutrality of Debt in Investment Timing: A New NPV Rule
dc.typeArticle
kusw.kuauthorSabarwal, Tarun
kusw.kudepartmentEconomics
kusw.oastatusfullparticipation
dc.identifier.doi10.1007/s10436-005-0016-9
kusw.oaversionScholarly/refereed, author accepted manuscript
kusw.oapolicyThis item meets KU Open Access policy criteria.
dc.rights.accessrightsopenAccess


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