This paper studies the price of an asset depending on both a fundamental and possible interventions of an authority. Using the martingale approach in continuous time, we provide closed-form solutions to switching problems involving irreversible, state dependent and intramarginal switch policies....

We develop a dynamic model to assess the effects of liquidity and leverage requirements on banks' insolvency risk. The model features endogenous capital structure, liquid asset holdings, payout, and default decisions. In the model, banks face taxation, flotation costs of securities, and default...

We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that...

We study the implications of credit market frictions for the dynamics of corporate capital structure and the risk of default of corporations. To do so, we develop a dynamic capital structure model in which firms face uncertainty regarding their ability to raise funds in credit markets and have...

If debt capacity is defined as the incremental debt optimally associated with an additional asset, then the debt capacity of growth options is negative. The underinvestment costs of debt increase and free cash flow benefits of debt fall with additional growth options. Thus, if firm value...

In this paper we examine the effects of capital gains taxation on firms' investment and financing decisions. We develop a real-options model in which the timing of investment, the decision to default, and the firm's capital structure are endogenously and jointly determined. Our analysis...