Journal articles

Refereed Journal Publications

Entering a new market: Market profitability and first-mover advantages, 2020, Journal of Corporate Finance, vol. 62. Co-authored with Mark Raun Moritzen.

  • We analyze a firm's 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.

The Impact of Assets-in-Place on Corporate Financing and Investment Decisions, 2015, Journal of Banking & Finance, Vo. 61, pp. 61-80. Co-authored with Saskia Clausen.

  • In a dynamic setting with asymmetric information we consider firms’ debt-equity choice and investment timing. We extend recent research by adding an abandonment option and assets-in-place and we show that these extensions make debt more attractive. This implies, e.g., that mature firms (with larger assets-in-place) mainly use debt financing, whereas young high-growth firms (without assets-in-place) frequently use equity financing and signal their type by early investment. Simulation analyses confirm this and our model is thus able to explain empirical patterns which contradict the static pecking order theory.

Uncertain Dynamics, Correlation Effects, and Robust Investment Decisions, 2015, Journal of Economic Dynamics and Control, Vol 51, Feb, pp. 278-298 (Formerly titled: Robust Investment Decisions and the Value of Waiting to Invest). Co-authored with Søren Hesel.

  • We analyze a firm׳s investment problem when the dynamics of project value and investment cost are uncertain. We provide an explicit solution using a robust method for an ambiguity averse firm taking this into account. Ambiguity aversion regarding a common risk factor impacts differently than ambiguity aversion regarding investment cost residual risk. Correlation between project value and investment cost matters; ambiguity aversion regarding common risk can decrease the investment probability only if correlation is positive. Ambiguity aversion regarding residual risk always increases the investment probability. When only project value is risky, volatility can monotonically decrease the investment threshold; this does not hold with the multiple prior method.

Options in Compensation: Promises and Pitfalls, 2014, Journal of Accounting Research, Vol. 52, No. 3, pp. 703-732. Co-authored with Hans Frimor and Claus Munk.

  • We derive the optimal compensation contract in a principal–agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment, optimal compensation entails rewards for high as well as low outcomes, and it is increasing at the mean outcome to motivate effort. If rewarding low outcomes is infeasible, compensation consisting of stocks and options is a near‐efficient means of overcoming the manager's induced aversion to undertaking risky investments, whereas stock compensation is not. However, stock plus option compensation may induce excessively risky investments, and capping pay can be important in curbing such behavior.

Dynamic capital structure with callable debt and debt renegotiation, 2014, Journal of Corporate Finance, vol. 29, pp. 644-66. Co-authored with Peter Ove Christensen, Kristian R. Miltersen, and David Lando.

  • We consider a dynamic trade-off model of a firm's capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders' own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders' bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure.

Robust Portfolio Choice with Stochastic Interest Rates, 2014, Annals of Finance, Vol. 10, 243-265. Co-authored with Linda Sandris Larsen.

  • We determine the optimal investment strategy for an ambiguity-averse investor in a setting with stochastic interest rates. The investor has access to stocks, bonds, and a bank account and he is ambiguous about the expected rate of return of both bonds and stocks. The investor can have different levels of ambiguity aversion about the two types of risky assets. We find that it is more important to take model uncertainty about the stock dynamics than model uncertainty about the bond dynamics into account. Furthermore, the investor’s ambiguity increases his hedging demand. Consequently, the bond/stock ratio increases with his ambiguity and implies less extreme positions in the bank account. Altogether, our model yields portfolio allocations which are more in line with what is implementable in practice. Finally, we demonstrate that neglecting model uncertainty implies significant losses for the investor.

Venture Capital Budgeting -- Carry and Correlation, 2013, Journal of Corporate Finance, Vol. 21, pp. 216-234. Co-authored with Kevin Berg Grell.

  • We analyze venture capital budgeting in a model with agency conflicts among entrepreneurs, venture capitalists, and investors. Our three-player setting is crucial for the analysis of compensation to venture capitalists. We focus on the venture capitalist's decision to invest in correlated enterprises, and we emphasize the importance of information and the venture capitalist's role in resolving adverse selection on the entrepreneurial side. The importance of information increases the minimum carried interest offered to the venture capitalist, whereas correlated projects decrease it. The carried interest is determined by the size and level of correlation in his portfolio. Our analysis provides predictions in line with a number of empirical observations, e.g. that venture capitalists typically receive a carried interest which is “sticky” around a 20% level.

Asset Liquidity, Corporate Investment, and Endogenous Financing Costs, 2013, Journal of Banking & Finance, Vol. 37, Issue 2, February 2013, pp. 474–489. Co-authored with Stefan Hirth.

  • We analyze how the liquidity of real and financial assets affects corporate investment. The trade-off between liquidation costs and underinvestment costs implies that low-liquidity firms exhibit negative investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities. If real assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Our findings demonstrate that asset liquidity is an important determinant of corporate investment.

Technological Advances and the Decision to Invest, 2013, Annals of Finance, Vol. 9, No. 3, August, pp. 383-420. Co-authored with Simon Lysbjerg Hansen.

  • Technological advances impact a firm’s investment decision, as they affect the investment cost. They can also affect the profitability due to demand shocks. We study a firm’s optimal investment decision when technological advances occur as surprises and induce uncertain reductions in the investment cost and in earnings. Despite this complex setting we derive closed-form solutions for the investment option value and the investment threshold. When technological advances only impact the investment cost, we demonstrate significant contributions compared to existing research, which restricts the analysis by keeping the expected investment cost path constant. For example, we show that, albeit the investment threshold is constant, the option value is very sensitive in the expected impact of technological advances. Leaving the restrictive setting, we obtain more intuitive results, e.g. that more frequent technological advances increase the option value. When technological advances impact future earnings we find important long-term effects: the investment threshold increases, whereas the option value decreases. Finally, earnings volatility postpones investment, while uncertainty due to technological advances expedites investment.

Asset Substitution and Debt Renegotiation, 2011, Journal of Business Finance & Accounting, vol. 38, no. 7-8, pp. 915-944.

  • In a dynamic capital structure model we study whether asset substitution implies agency costs when the firm initially takes the substitution option into account. Asset substitution affects earnings in two directions: volatility increases and growth rate decreases. We show that substitution implies agency costs if volatility increases enough. In this case, debt renegotiation to avoid substitution mitigates the ex ante costs. However, debt renegotiation decreases the equity holders’ ex post costs. Thus, with a modest volatility increase, debt renegotiation allows equity holders to extract concessions from creditors albeit asset substitution was not chosen for non‐renegotiable debt. Hence, debt renegotiation need not improve ex ante firm value if asset substitution is allowed for.

Capital Structure and Assets: Effects of an Implicit Collateral, 2008, European Financial Management, vol. 14, no. 2, pp. 347-373.

  • This paper analyses a firm's 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.

Værdiansættelse af optioner i aflønningskontrakter, (translated title: The Valuation of Executive Stock Options), 2003, Finans/Invest no. 4 pp. 22-32. Co-authored with Claus Munk.

  • We investigate the valuation of executive stock options and, specifically, how such cannot simply be valued using the BlackScholes formula. In particular, we address the impact if the manager's risk aversion on exercising a package of options and that options may not optimally be exercised at the same time.

Restrukturering eller konkurs -- lad markedet være en vej videre efter corona, (translated title: Restructuring or liquidation -- let the market be an avenue after corona.), 2021, Finans/Invest, Vol. 3, pp. 16-23. Co-authored with Alexander Schandlbauer.

  • In this paper we consider how bankruptcy rules can alleviate the return to normal market conditions after COVID-19. We set up a simple dynamic model for a financial disterssed firm to illustrate that the flexibility in a Chapter 11 setup is particularly valuable when a change to better economic conditions are expected soon. In relation to this we discuss some elements of the Danish bankruptcy code and argue that, on the ond hand, the time-out period for restructuring should be extended, but on the other hand, the period shoud also be limited to avoid excessive lending to non-viable firms and to curb the risk of zombie lending.