Debt Maturity Choices, Multi-stage Investments and Financing Constraints

We develop a dynamic investment options framework with optimal capital structure and analyze the effect of debt maturity. We find that in the absence of financing constraints short-term debt maximizes firm value. In contrast with most literature results, in the absence of constraints, higher volatility may increase initial debt for firms with low initial revenues, issuing long term debt that expires after the investment option maturity. This effect, which is due to the option value of receiving the value of assets and remaining tax savings, does not hold for short term debt and firms with high profitability, where an increase in volatility reduces the firm value. The importance of short-term debt is reduced in the presence of non-negative equity net worth or debt financing constraints and firms behave more conservatively in the use of initial debt. With non-negative equity net worth, higher volatility has adverse effects on the firm value, while with debt financing constraints higher volatility may enhance firm value for firms with relatively low revenue that have out-of-the-money investment options

Aid and Growth in the Pacific Islands

The literature on the aid–growth relationship has recently been reinvigorated through the application of growth equations that seek to explain growth as a function of institutions, policies and aid. This approach has generally led to the conclusion that aid has contributed to growth, albeit with decreasing returns. Some studies have found that there is only a positive relationship between aid and growth when there is a favourable policy environment—a finding that has been used to provide a reason for the reallocation of aid to better-performing countries and an increased emphasis by donors on aid conditionality. It is unclear whether these conclusions apply to the Pacific island countries given their unusual features: notably, small populations, remote locations and a high level of aid. This paper draws on the recent literature in examining the aid–growth relationship in seven Pacific island countries. A positive relationship between aid and growth is identified, although it is subject to decreasing returns. The study is unable to provide an adequate explanation for the role of institutions and policy in growth in the countries studied, or determine whether aid only contributes to growth when favourable policy environments are in place