Empirical Research On Investment Options With Debt Financing Constraints Of Listed Companies In China

The main purpose of this study is to investigate the effect and importance of debt financing constraints on firm's timing of investment decision, firm value and some other important variables like the credit spreads. The study of these issues are also important since some parameters like the tax rate, the risk-free rate, but also the level of debt constraints themselves, can be potentially be controlled by policy makers. We build on the contingent claim approach to investigate these issues. Building on the Mauer and Sarker (2005) model that captures both investment timing flexibility and optimal capital structure and risky debt, we study the impact of debt financing constraints on firm value, the optimal timing of investment and other important variables like the credit spreads. Moreover, we suppose a extended model which is based on the Mauer and Sarker (2005) model, namely the extended-Leland/MS model that includes both investment options and debt financing gains, and we compare the extended-Leland/MS model with the Leland (1994) model (with the debt financing only) and the McDonald and Siegel (1986) model (with the investment options only). We adopt the contingent claims framework of Mauer and Sarkar (2005) and study debt financing constraints which may exist due to exogenous regulatory restrictions set to financial institutions. Therefore, In the Mauer and Sarkar model we introduce and study the impact of debt financing constraints. We study the effect of debt financing constraints in respect to the risk-free rate, dividend yield (competitive erosion), volatility of the value of unlevered assets, bankruptcy costs and taxes. In the numerical sensitivity we also show the effect of financing constraints on equity value, the bankruptcy triggers, the optimal leverage, and the credit spreads.In empirical research, we find that there is a trade-off between investment timing flexibility and debt financing gains. The importance of debt financing constraints on firm value and investment policy depends largely on the relative importance of investment timing flexibility and debt financing gains. Furthermore, investment timing flexibility has high relative importance. The firm can mitigate the effects of debt financing constraints by adjusting its investment policy. We show that these adjustments are non-monotonic and may create a U shape of the investment trigger as a function of the degree that debt is constrained. We show that in a reduced investment horizon, constraints have a more significant impact on firm value. Additionally, we implement the models with finite maturity horizon for the investment option using a numerical lattice scheme and investigate the effect of financing constraints depending on the maturity of the investment option. Especially, We use the Mauer and Sarkar (2005) contingent claims model of firm value with the option for optimal investment timing and net benefits of risky debt (that allows for optimal capital structure and endogenously determined optimal bankruptcy), with an adaptation so that it is consistent with Leland (1994). We make the interesting observation that in this extended model firm value exhibits a U-shape in volatility, and this result is not reported in previous research. The results of the research provide the empirical evidences for listed companies to deal correctly with relations between debt financing constraints and investment options.