Study On The Interactions Of Investment And Financing Decisions Of Technology Innovation Based On Real Options Approach

Technology innovations are important motive forces of promoting the development of international economy, and the main means by which firms survive and develop. Notably, both the market demand of a new technology and the environment of future innovations are uncertain, and these uncertainties reveal step by step with the advance of time and the decisions made by firms, which will endow firms with decision flexibilities. However, besides these two kinds of uncertainties, the imperfect features in capital markets, such as tax, bankruptcy cost and financing cost, the conflicts among stockholders, and the asymmetric information between the firms and the outer investors, etc, will also have critical effects on firms' decisions of investing in technological innovations.Assuming that the output price of the existing technology follows a geometric Brownian motion and the value of the existing technology drops for a percentage at the Poisson jump arrival of a future innovation, this dissertation considers the imperfect features in capital markets and develops the real options models of investment and financing decisions of technology innovations. Specially, we examine different impacts of the market and the technological uncertainties on the interactions of investment and financing decisions. The main contents and results of this dissertation are following.Firstly, considering the interest-tax-shield of debt and the possibility of bankruptcy, we develop a simple real option model of investment and financing decisions. After investigating the impacts of uncertainties on the investment threshold, the bankruptcy trigger and the optimal level of debt, we find that both the market uncertainty and the technological uncertainty will delay the adoption of the existing technology. However, they affect the bankruptcy decision and the optimal level of debt in opposite directions. Moreover, the capability of bearing debt and the flexibility of delaying investment enhance each other reciprocally.Secondly, we investigate a general situation in which firms keep operating and wait for the improvement of performance by paying financing cost or bearing financial crisis cost, but not to break operation or go bankruptcy. Our basic conclusion is that financing constraints will make firms adopt new technology more lately. Comparing the impact of the market uncertainty with that of the technological uncertainty on the delaying effect of financing constraints, we find that the delaying effect enhances with the increase of the market uncertainty while increasing the technological uncertainty will diminish the delaying effect of financing constraints.Thirdly, we develop a unified real option model to examine the underinvestment and the overinvestment when there are conflicts between shareholders and creditors. After investigating the mechanisms of the underinvestment and overinvestment respectively, we conclude that the ratio of the new and the old debt is a meaningful measure in identifying which of the inefficient investment behaviors will occur. Moreover, both the market and the technological uncertainties mitigate the inefficient investment, and the market uncertainty mitigates underinvestment more significantly while the technological uncertainty mitigates overinvestment more significantly.Lastly, considering the possibility that firms' ability of investing in the existing technology will be constrained due to the volatility of the internal cash flows and the difference between internal and external financing, the dissertation investigates the impacts of the elementary determinants of firms' financing capability on the investment decisions and strategies of technology innovations. The results show that the possibility of the scarce of funds impels firms to adopt the new technology as soon as possible, and the impacts of the determinants of firms' external financing capability explain some investment behaviors of the listed firms in China and the previous empirical results. Moreover, we find that firms tend to choose the strategy of delaying investment more likely when the market uncertainty is high, while the strategy of immediate investment will be chosen more likely, when the technological uncertainty is high.