This paper analyses optimal irreversible investment policy when profits are subject to a multiplicative geometric Brownian motion shock. The marginal product of capital is increasing initially and decreasing thereafter. In the latter range, optimal policy is familiar: capacity is added gradually...

We develop a formula for the market value of debt when the borrower`s repayment capacity varies stochastically, and shortfalls are rolled over. The value of a marginal dollar of nominal claim is an S-shaped function of the ratio of the repayment capacity to the amount of nominal debt. Shifts of...

Capital investment decisions must recognize the limitations on the firm's ability to later sell off or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how this valuation relates to the q-theory of investment, and how these options...