Christian Riis Flor

Capital Structure and Assets: Effects of an Implicit Collateral

This paper analyses a firms capital structure choice when assets have outside value. Valuable assets implicitly provide a collateral and increase tax shield exploitation. The key feature in this paper is asset value uncertainty, implying that it is unknown ex ante whether the equity holders ex post optimally sell the assets or re-optimise the capital structure. Ex ante, more uncertain asset value decreases leverage, but not firm value, and selling the assets becomes less likely. Firms should tend to invest in assets whose value is less correlated to changes in earnings and, in addition, asset sales are less likely when this correlation is low.

Entering a New Market: First-Mover Advantages and Risk Dynamics under Market Uncertainty

We analyze a firms investment problem when it faces preemption risk and profits are convex in market profitability. In a setup where firms have asymmetric profit convexity, which we relate to firm quality, we show that this has interesting effects on valuation and the order of entry. The interplay between profit convexity and market growth impacts whether a high-quality or a low-quality firm is the first mover. We relate the first-mover advantage to patents; we find that patents expedite investments and increase the incentives for high-quality firms to become first movers. Furthermore, even with a persistent first-mover advantage we show that first-mover advantages in terms of firm value are either over- or underestimated. Thus, our model sheds light on why empirical studies find mixed support for the existence of a first-mover advantage.