Real Option Analysis on Interactions of Investment and Financing Decisions

This paper establishes models of value-maximizing decisions of corporate investment and financing with real options. It finds that under the influences of debt tax benefits and bankruptcy costs, there exist interactions between corporate investment and financing, and also it expounds on the mechanism for their interactions. The paper holds that the only way for decision-makers to minimize the firm risk and maximize the firm value is to recognize the interactions of investment and financing, and to jointly determine these two. It offers a framework for the collaborative decision-making of investment and financing, helps to improve efficiency of investment and financing, better the firm's performance, and finally reaches the ultimate goal of sustainable development of economy in our country. This paper also offers a new perspective for risk management of the firm by emphasizing joint decisions of investment and financing.