R&D Investment timing, default and capital structure

  • Daniela Bragoli
  • Flavia CortelezziEmail author
  • Pierpaolo Giannoccolo
  • Giovanni Marseguerra
Original Research


This paper investigates the interaction between R&D investment timing, probability of default, and capital structure. In particular we are interested in studying the investment behaviour of three different types of firms according to their capital structure: firms that only use internal funds as a source of funding (unlevered), firms that use debt and that are able to attract unlimited amount of funds (levered unconstrained) and finally firms that use debt, but are not able to attract all the amount needed (levered constrained). We consider irreversible investments in R&D with uncertain returns, financed through debt. We show that debt financing (with or without constraints) significantly alters the standard results in the real option literature. First, we show that leverage distorts the investment threshold and shareholders of a levered firm tend to accelerate investment with respect to an all equity financed firm. This finding is explained by the fact that the increase in the probability of default, which is positively correlated with leverage, might induce a potential loss of the investment option and thus reduce the value of the option to wait providing equity holders with an incentive to speed up the investment. Second, if we introduce the financial constraint, the investment threshold is characterized by a U-shaped relation. The latter implies that the investment threshold diminishes as the financial constraint becomes less stringent, but up to a certain minimum value. After a certain amount of leverage the firm attitude towards R&D investment changes. The firm becomes more risk adverse, given the much higher probability of default (linked to a much higher leverage in its balance sheet).


R&D Real options Capital budgeting Debt financing constraint 

JEL Classification

G1 G31 G32 D81 



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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  • Daniela Bragoli
    • 2
  • Flavia Cortelezzi
    • 1
    Email author
  • Pierpaolo Giannoccolo
    • 3
  • Giovanni Marseguerra
    • 2
  1. 1.Department of Law, Economics and CultureInsubria UniversityComoItaly
  2. 2.Department of Mathematics and EconometricsCatholic University of MilanMilanItaly
  3. 3.Department of EconomicsUniversity of BolognaBolognaItaly

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