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Study On Competitive Investment And Risky Debt: Real Options Approach

Posted on:2005-08-01Degree:DoctorType:Dissertation
Country:ChinaCandidate:X H LiuFull Text:PDF
GTID:1116360152967365Subject:Probability theory and mathematical statistics
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In uncertain circumstances, market demand conditions and the corporate values change stochastically, and the corporate faces various kinds of risks during decision-making of investment and financing. The mixture of risks makes difficult for the corporate to make decisions. Real options theory, which combines corporate finance, investment decisions and management science, deeply applys mathematical tools, such as stochastic calculus, optimal stopping times, martingale, stochastic differential equations, game theory, etc. Real options analysis overcomes the drawbacks of traditional methods, and provides a new method of investment decisions, financing policies and risk management for the corporate. This thesis adopts real options approach to study investment decisions in competitive circumstances and valuation of risky debt of the corporate. Chapter 1 outlines and analyzes current research situations on the adoption of real options approach to study investment decisions in competitive circumstances and valuation of risky debt of the corporate in the literature. Chapter 2 presents the relevant models. The main ideas and contributions of this thesis are as follows.1. Study on the strategic research & development (R&D) investment decisions with a potential competitor. Chapter 3 considers an uncertain and competitive market, where the incumbent corporate conducts cost-reduction R&D, taking account of the fact that the corporate has installed a production capacity before performing R&D. The R&D investment leads to cost advantage and the investment opportunity can be looked as a growth option. The value of investment opportunity with capacity installed is derived by means of game theory. For the case that the stochastic market demand follows a uniform distribution, the explicit expression of the investment threshold is obtained; and the result shows that the larger expectation of market demand, the stronger cost-reduction effect and the larger installed capacity encourage the investment. For the case that the stochastic market demand follows a lognormal distribution, the impacts of the uncertainty over the market demand on R&D investment decisions are ambiguous, which are influenced by the cost-reduction effect and the installed capacity.2. Study on competitive investment strategies of symmetric duopoly taking into account technology innovation. In dynamic uncertain environments, the investment timing of the firm about adopting the existing new technology is influenced by the rival's actions and technological progress. Chapter 4 employs option games approach to present a simplified duopoly continuous time model of technology adoption. In the model, the irreversible investment in adoption of the existing new technology is in strategic competitive circumstances and facing the threat of a further new technology after the competition setting is established. The results show that rapid displacement of the technology encourages the leader's investment and discourages the follower's investment. Comparing with the optimal timing without the expectation of a further new technology, the firm hastens to invest when no firm has invested; however, once one firm has invested first, the firm will delay the investment. Using mixed strategy analysis, competitive investment strategies with sequential exercise and simultaneous exercise are derived.3. Study on corporate debt and endogenous bankruptcy. In corporate practices, the corporate is liquidated immediately or as a going concern when the corporate is in financial distress and declares bankruptcy. With the existence of corporate tax benefits and bankruptcy costs, Chapter 5 examines corporate debt and endogenous bankruptcy in a risk-neutral framework. While corporate bankruptcy and taking over understood as the options held by the equity holders and the creditor, bankruptcy decisions of the levered corporate with different leverage are discussed in detail after the values of contingent claims on the corporate assets have been obtained. The analysis shows that debt has import...
Keywords/Search Tags:Real Options, Game Theory, Default Risk, Endogenous Bankruptcy, Stochastic Calculus, Optimal Stopping Times, Martingale, Stochastic Differential Equation
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