Debt Financing, Loan Market Structure and Enterprise Investment Decisions Based on Real Option

In the uncertain economic environment, being the major source of project capital, debt financing can affect the firm's investment efficiency. In this paper we analyze the impact of debt financing on irreversible investment using real option method, and analyze numerically the impact of debt financing level and uncertainty on the investment trigger and option value under different loan market structures. Compared with the unlevered firm and the levered firm in the competitive loan market, the levered firm in the imperfectly competitive loan market waits to the higher investment trigger to undertake the investment for lack of money. The higher the bargaining power of the bank, the higher the coupon charged, the higher the investment trigger but the lower the value of waiting to invest.