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Last Resort Gambles, Risky Debt and Liquidation Policy

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  • E. Agliardi
  • R. Andergassen

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 pro jects which may bo ost 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. We show that last resort gamble strategies delay liquidation. We study how the liquidation and the last resort gamble strategies are affected by the firmÕs capital structure.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 577.

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Date of creation: Nov 2006
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Handle: RePEc:bol:bodewp:577

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