Investment, Irreversibility, and Financial Imperfections

Abstract

Research finds that firms' investment decisions are distorted by irreversibility and finance constraints. Whereas the existing literature examines the exects of these features separately, this paper studies their interaction. The impact of these constraints on a firm's incentive to invest is characterised using option pricing techniques. Financial constraints reduce the initial capacity, raise the marginal value product of capital and the value of the option to invest.Irreversible investment, financial constraints