Enterprise Investment and Financing Decisions under a Stockholder-Bondholder Conflict Based on Real Option

In the modern companies the managers are often on behalf of the interests of the stockholders. The purpose of the investment decision is equity-maximizing but not value-maximizing, so the stockholder-bondholder conflict exits. This paper examines the impact of a stockholder-bondholder conflict over the overinvestment behavior and optimal capital structure choices using real option method, in order to explain the investment and financing decisions in the firm. We obtain the unlevered firm investment model - the value of levered firm model - and levered firm investment model. Based on the assumption that the investment is financed by the debt and the firm has no other assets before investment, so the project risk is high after investment than before investment. Numerical solutions show that stockholders are inclined to overinvestment, and choose to exercise the investment option too early and have the incentive to choose riskier investment projects, which affect the firm value and optimal leverage choices, do harm to the interests of bondholders. This model can give an explanation for the firms´ overinvestment behavior, especially for the listed companies in China.