alexa DETERMINANTS OF CORPORATE BORROWING
Social & Political Sciences

Social & Political Sciences

Journal of Civil & Legal Sciences

Author(s): Stewart C MYERS

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Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such ‘real options’ depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a sub- optimal investment strategy or by forcing the thm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.

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This article was published in Journal of Financial Economics and referenced in Journal of Civil & Legal Sciences

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