The Effect of Financial Constraints on R&D Investments

Daniela Bragoli, Giovanni Marseguerra, Flavia Cortelezzi, Pierpaolo Giannoccolo

Risultato della ricerca: Contributo in libroChapter

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.
Lingua originaleEnglish
Titolo della pubblicazione ospiteWorking Paper DIPARTIMENTO DI DISCIPLINE MATEMATICHE, FINANZA MATEMATICA ED ECONOMETRIA
Pagine3-34
Numero di pagine32
Stato di pubblicazionePubblicato - 2018

Keywords

  • R&D
  • capital budgeting
  • real options

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