| Firm assets can be decomposed as assets-in-place and growth options.In uncertain decision environment,the firms not only have operating flexibility to decrease fixed operating costs by contracting assets-in-place,but also have investment flexibility to exercise or create growth options.More importantly,because of the difference in risk-return characteristics between assets-in-place and growth options,both the contracting of assets-in-place and the exercising or creating of growth options would have dynamic effects on risk premium by changing the relative composition of total assets.In addition,in the presence of debt financing,the agency conflicts between shareholders and debtholders in contraction or investment decsions would also affect optimal capital structure of leveraged firms.In a framework aiming to link asset side with equity/liabilities side in the balance sheet,this dissertation takes assets-in-place with contration flexiblities and growth options with investment flexibilities as the basic components of firm assets.Using real option approach,pricing kernel technology and numerical analysis method,this dissertation contributes to uncovering the theoretical mechanism about the roles of the relative composition of total assets and the decision flexibilities embedded in both assets-in-place and growth options in determining asset pricing and optimal capital structure.In addition,this dissertation uses a sample of A-share firms listed on Shanghai and Shenzhen exchanges to test key theorecital predictions.The core contents and key conclusions are as follows.First,this dissertation investigates both the exercising and the creating of growth options in a unified framework from a perspective on firm lifecycle.Adopting real option approach and pricing kernel technology,this dissertation theoretically demonstrates the opposing effects of the exercising and creating of growth options on risk premium and then uncovers how the dynamics of growth options determine possible changing trends of risk premium over firm lifecycle.Theoretical predictions are further tested using capital expenditures and R&D investments as the proxies for the exercising and creating of growth options,respectively.The theoretical and empirical results consistently show that the exercising and the creating of growth options would decrease and increase risk premium,respectively,and that the negative effect of the exercising of growth options on risk premium is more pronounced for young firms,while the positive effect of the creating of growth options is more pronounced for mature firms.In addition,theoretical predictions also suggest that the gradual exercising of growth options would lead to a downward trend of risk premium over time,but a U-shaped change of risk premium may appear for firms being able to create continuously new growth options in the mature stage of their lifecycle.Second,because operating leverage and contraction options are simultaneously embedded in assets-in-place,this dissertation theoretically demonstrates the influences of contraction options and operating leverage on risk premium and then provides strictly theoretical proof for value premium phenomenon stemming from the interaction between high operating leverage and limited operating flexibility.Theoretical predictions are also tested by investment portfolio analysis.The theoretical and empirical results consistently show that contraction option with negative Beta is negatively related to risk premium,while operating leverage is positively associated with risk premium,and that the joint effects of operating leverage and contraction option can theorecitcally give an explanation for value premium.In addition,theoretical results indicate that contraction option decreases the explanatory power of size factor for risk premium,and operating leverage increases the explanatory power of book-to-market factor and decreases the explanatory power of size factor for risk premium,respectively.Third,based on the trade-off theory of capital structure between interest tax shield and bankruptcy cost,this dissertation demonstrates how the gradual exercising of growth options determines the dynamic of optimal capital structure over firm lifecycle and further investigates the effect of shareholder-debtholder conflicts on the dynamic of optimal capital structure.The theoretical results show that,by gradually making capital investments,more and more growth options will be converted into assets-in-place,which decreases default risk and thus results in an increase in optimal financial leverage over firm lifecycle.Moreover,the underinvestment problem stemming from the shareholder-debtholder conflicts would decrease the optimal financial leverage,but the agency cost will decrease as the firm grows into maturity.Empirical evidence about the dynamic of optimal financial leverage and the effect of agency conflicts on financial leverage support theoretical predictions well.Finally,by developing a real option model simultaneously describing the contraction decision on assets-in-place and the bankruptcy decision of levered firm,this dissertation theoretically analyzes how the agency conflicts between shareholders and debtholders in contraction decision affect the optimal capital structure and the relation between operating leverage and financial leverage.A sample of A-shares firms listed on Shanghai and Shenzhen exchanges and a natural experiment that China enacted the Labor Contract Law in 2008 are used to test theoretical predictions.The theoretical and empirical results consistently find a possibility that contraction flexibility will do harm to financial leverage when the shareholder-debtholder conflicts dominate the benefits of contraction decisions,and that the negative relation between operating leverage and financial leverage is persistent only in the presence of contraction flexibility.Moreover,empirical evidence suggests that an increase in the proporations of bank loans or long-term debt in total liabilities would be helpful for levered firms to alleviate the negative effect of contraction flexibility on financial leverage. |
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