The effects of costly exploration on optimal investment timing

This paper investigates a principal-agent model in which an owner (principal) optimizes a contract with a manager (agent) delegated to undertake an investment project. In the model, we explore the effects of costly exploration by which the manager learns the real value of development cost. We show that high exploration cost can lead to a pooling policy not contingent on project type. Further, and more notably, we show that, in the presence of asymmetric information, higher exploration cost leads to wealth transfer from owner to manager and can then play a positive role in preventing a greedy contract by the owner and improving social welfare.Real Options; Asymmetric Information; Costly Learning; Sequential Investment; Incentive Theory

Investment timing with fixed and proportional costs of external financing

We develop a dynamic model in which a firm exercises an option to expand production with cash balance and costly external funds. While related papers explain their results only by numerical examples, we analytically prove the following results. In the presence of only a proportional cost of external financing, the firm with more cash balance invests earlier; however, the presence of both proportional and fixed costs leads to a non-monotonic relation between the investment time and cash balance. The firm with more cash balance invests later to save a fixed cost, particularly when the cash balance is close to the investment cost. Our results can potentially account for a variety of empirical results concerning the relation between investment volume and financing constraints.Real options; investment timing; costly external financing; growth option; optimal stopping.

Asset sale, debt restructuring, and liquidation

This paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether to proceed to debt restructuring or direct liquidation at an arbitrary time. In the model, we show the following results. Fewer asset sales, lower financing, debt renegotiation, and running costs, a lower premium to the debt holders, a lower cash flow volatility, and a higher initial coupon increase the shareholders’ incentive to choose debt restructuring to avoid full liquidation. In the debt renegotiation process, the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders. The timing of debt restructuring always coincides with that of liquidation without debt renegotiation. Most notably, the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs. The possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure

Default and liquidation timing under asymmetric information

We consider a dynamic model in which shareholders delegate a manager, who observes private information about running and liquidation costs of the firm, to operate the firm. We analytically derive the shareholders’ optimal contract contingent on the cost structure of the firm. The information asymmetries change the high-cost firm’s default and liquidation timing. Even if the liquidation value is higher than the face value of debt, the shareholders of the high-cost firm, unlike in the symmetric information case, can choose default rather than liquidation in order to reduce the information rent to the manager. The information asymmetries accelerate negative liquidation and delay positive liquidation, while they accelerate default. Although the information asymmetries decrease the equity and firm values, they may increase the debt value. The optimal leverage ratio of the asymmetric information case becomes higher than that of the symmetric information case because more debt mitigates the loss due to the information asymmetries. Our results can potentially account for many empirical findings

The Selection of the Representative Year of Stream Flow for Electric Power Generation

An analysis of the actual state of the combination of the load and the hydro-and steam-power in a large combined hydro-steam power system is necessary for any economic comparison between various types of hydro- and steam-power generation; and for the power generation by a plant of the run-off-river type as well as of the pondage and storage types, it sometimes involves an inspection of the daily stream flow in connection with the daily load curve throughout a year. In such cases, it being difficult to draw a daily stream flow diagram for the future, it sometimes becomes necessary to select the representative year representing a typical stream flow from the data in the past. This paper describes the method for its selection

Estimation of the Average Stream Flow in the Immediate Future for Hydro-electric Power Generation

In making an economical study of a large combined hydro-steam power system, it is necessary to estimate the annual average available power of the rivers for any given year in the immediate future, and, especially for the control of a plant of pondage or storage type, to estimate the drought-seasonal average stream flow during the coming winter. In this paper we shall study the method for estimating the annual average stream flow by means of the theoretically based method of statistical extrapolation, and the method for estimating the drought-seasonal average stream flow during the coming winter by means of the method of statistical extrapolation for a time series with two members, by analysing the existing data of the seasonal average stream flows during winter and autumn over a number of recent years, including that for autumn of the estimated year, taking the data of certain rivers as examples