The agency problem, investment decision, and optimal financial structure

Jyh Bang Jou, Tan Lee

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


This article constructs a real options model in which a firm has a privileged right to exercise an irreversible investment project with a stochastic payoff. Supposing that the investment costs are fully sunk, a firm that exercises the investment option after debt is in place will then choose a better state to exercise this option as it issues more bonds. This debt-overhang phenomenon, however, benefits the firm since waiting is itself valuable. Accordingly, the firm will both exercise the investment option later and issue more bonds as compared with a firm that issues bonds upon exercising the investment option.

Original languageEnglish
Pages (from-to)489-509
Number of pages21
JournalEuropean Journal of Finance
Issue number6
StatePublished - Dec 2004


  • Bankruptcy
  • Financial structure
  • Irreversible investment
  • Limited liability


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