Effects of Knightian Uncertainty on Interactions between Investment and Financing Decisions

This study examines the interactions between investment and financing decisions under Knightian uncertainty. We first derive the optimal coupon and investment threshold under Knightian uncertainty. When financing and investment decisions interact, the jointly optimal coupon decreases with the degree of Knightian uncertainty, which supports empirical research. We show that the tax effect on investment decisions increases as the degree of Knightian uncertainty increases. We also find that the jointly determined coupon is less influenced by Knightian uncertainty