What question did this study set out to answer?

This research aims to understand how production flexibility affects investment timing and capital structure decisions in firms.

On the Interplay of Production Flexibility, Capital Structure, and Investment Timing

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Explores how production flexibility influences financing and investment timing in firms, indicating its significance for managerial strategies.

This research aims to understand how production flexibility affects investment timing and capital structure decisions in firms.
Developed a continuous-time optimal stopping model for operational decision-making.
Measured production flexibility through switching costs.
Analyzed the relationship between capital structure, debt usage, and the firm's operational flexibility.
Optimal debt usage varies nonmonotonically with production flexibility, first decreasing and then increasing as switching costs rise.
When switching costs are low, optimal debt level declines slowly with increasing costs; during intermediate costs, it decreases sharply.
Beyond a certain threshold of switching costs, firms increase debt significantly to maximize tax shields, sacrificing production flexibility until default.

Lai et al. (2023) studied this question.

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Explores how production flexibility influences financing and investment timing in firms, indicating its significance for managerial strategies.