This paper investigates the interaction between investment decisions, company foreclosure, and capital structure in the case of a constrained firm. We consider irreversible investments in R\&D projects with uncertain returns, financed through debt. Uncertainty comes from two different sources: the technological success of the project is probabilistic, and the return from investment evolves stochastically over time. These two elements, together with the lack of historical performance represent a substantial risk to the lenders, which will limit substantially the availability of loans. In our analysis, we first assume that the firm finances the R&D project through debt, and then, we further assume that the firm's debt capacity is limited to a certain amount. We show that leverage distorts the investment threshold and the shareholders of a levered firm accelerate investment with respect to an all equity financed firm. Moreover, when a firm is "financially constrained", it tends to overinvest compared to a non constrained levered firm. Thus, the financial constraint induces firms to play a "bird in the hand" investment strategy.

Bragoli, D., Cortelezzi, F., Giannoccolo, P., Marseguerra, G., The Effect of Financial Constraints on R&D Investments, Working Paper DIPARTIMENTO DI DISCIPLINE MATEMATICHE, FINANZA MATEMATICA ED ECONOMETRIA, Vita e Pensiero, Milano 2018: 3-34 [http://hdl.handle.net/10807/118420]

The Effect of Financial Constraints on R&D Investments

Bragoli, Daniela;Cortelezzi, Flavia;Giannoccolo, Pierpaolo;Marseguerra, Giovanni
2018

Abstract

This paper investigates the interaction between investment decisions, company foreclosure, and capital structure in the case of a constrained firm. We consider irreversible investments in R\&D projects with uncertain returns, financed through debt. Uncertainty comes from two different sources: the technological success of the project is probabilistic, and the return from investment evolves stochastically over time. These two elements, together with the lack of historical performance represent a substantial risk to the lenders, which will limit substantially the availability of loans. In our analysis, we first assume that the firm finances the R&D project through debt, and then, we further assume that the firm's debt capacity is limited to a certain amount. We show that leverage distorts the investment threshold and the shareholders of a levered firm accelerate investment with respect to an all equity financed firm. Moreover, when a firm is "financially constrained", it tends to overinvest compared to a non constrained levered firm. Thus, the financial constraint induces firms to play a "bird in the hand" investment strategy.
Inglese
978-88-343-3587-1
Vita e Pensiero
Bragoli, D., Cortelezzi, F., Giannoccolo, P., Marseguerra, G., The Effect of Financial Constraints on R&D Investments, Working Paper DIPARTIMENTO DI DISCIPLINE MATEMATICHE, FINANZA MATEMATICA ED ECONOMETRIA, Vita e Pensiero, Milano 2018: 3-34 [http://hdl.handle.net/10807/118420]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/118420
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