Topic: Investment under Uncertainty and the Value of Real and Financial Flexibility

Speaker:Neng Wang, Professor of Finance, Columbia Business School, Columbia University

Date: October 14th (Wed.)

Time: 10:00-11:30am  

Location: Building 4, Room 102

Language: English

Abstract:

We develop a model of investment timing 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 depend on both its earnings fundamentals and 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 is highly nonlinear and non-monotonic in the firm's internal funds; 2) in contrast to predictions implied by standard corporate savings models, a financially constrained firm may behave in a risk seeking sense (and thus firm value may be convex in liquidity) due to the interaction between financial and real (growth/abandonment) flexibility; 3) 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.

About the speaker:

Neng Wang is the Professor of Finance at Columbia Business School, Columbia University. He is also the Research Associate of National Bureau of Economic Research since 2009. Professor Wang received a B.S. in Physical Chemistry from Nanjing University in 1992, and a M.S. in chemistry from California Institute of Technology and a Ph.D. in Finance from Stanford University. His research fields are corporate finance, asset pricing, macroeconomics and real estate finance. His papers have appeared in Journal of Financial Economics, Review of Financial Studies, and Journal of Finance and other leading finance journals.