Optimal capital structure and the impact of time-to-build

Abstract

We develop a dynamic investment options model with optimal capital structure and evaluate the effect of time-to-build on firm value and leverage choices. With time-to-build the firm increases initial leverage in order to reduce the impact of delayed cash flows resulting from time-to-build. The impact of time-to-build is more severe the higher the revenue volatility and competitive erosion, and when the firm issues long-term debt. Time-to-build is shown to have a substantial impact on firm values for plausible parameter values.