The impact of technology choice on capital structure
Innovative Technology at the Interface of Finance and Operations, pp.
The very nature of technology can affect the timing of investments and the combinations of equity and debt used to finance them. These decisions are also impacted by the assets in place and how they are financed. This chapter explores how the flexibility built into the technology impacts the timing and financing decisions. The models developed are all based on real option valuation where interest rates on all debt are endogenously determined. We not only explore whether operational flexibility induces earlier or later investment and more or less use of debt, but we also explore how bond priority rules affect decisions, how operating leverage affects decisions and whether financial contracts can be designed so as to facilitate first best outcomes. Overall our results suggest flexibility is accompanied with less use of debt and earlier adoption of new investments.