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Last resort gambles, risky debt and liquidation policy

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  • Agliardi, Elettra
  • Andergassen, Rainer

Abstract

This paper develops a real option model in which the interaction between debt, liquidation policy and risky investments is studied. We consider a manager who owns the firm and faces the opportunity to invest in risky projects which may boost current profits at the cost of bankruptcy if they turn out to be unsuccessful. These investments are "last resort gambles" in the sense that, if successful, they save the company from insolvency, while, if unsuccessful, they make liquidation unavoidable. It is shown that last resort gambles delay liquidation. We study how the liquidation trigger and the last resort investment decisions are affected by the firm's capital structure.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 18 (2009)
Issue (Month): 3 (August)
Pages: 142-155

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Handle: RePEc:eee:revfin:v:18:y:2009:i:3:p:142-155

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Web page: http://www.elsevier.com/locate/inca/620170

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Keywords: Last resort gambles Risky investments Liquidation policy Real options;

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