Topic：Investment under Uncertainty and the Value of Real and Financial Flexibility
Time：May 19, 2014（Monday）15:00-16：30
Venue：Room 501, Jiageng Bld 2
Presenter：Jinqiang Yang, Associate Professor of Finance, Shanghai University of Finance & Economics
Chiar：Tony Ruan, assistant professor of Finance, IFAS
Abstract：
We develop a model of investment under uncertainty for a financially constrained firm. Facing external financing costs, the firm prefers to fund its investment through internal funds, so that the firm’s optimal investment policy and value now depend on its liquidity holdings. We show that financial constraints significantly alter the standard real options results, with the financial flexibility conferred by internal funds acting as a complement, and at times as a substitute, to the real flexibility given by the optimal timing of investment. We show that: 1) the investment hurdle (whose deviation from the first-best Modigliani-Miller benchmark measures investment distortions) is highly nonlinear and non-monotonic in the firm’s internal funds, as the firm may prefer accumulating internal funds rather than accessing external capital markets to finance investment when internal funds are sufficiently high; 2) with multiple rounds of growth options, a value-maximizing financially constrained firm may choose to over-invest via accelerated investment timing) in earlier stages in order to mitigate under-investment problems in later stages.
Presenter Introduction：
Prof. Yang got his PhD, MS and BS from Hunan University and was Visiting Scholar at Columbia University from 2009 to 2011. His research interests include asset pricing, corporate finance, and macroeconomics. He has published papers in top finance journals like Review of Financial Studies, Journal of Financial Economics, and Quantitative Finance, etc.