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The Economic Value of Flexibility When There is Disagreement

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Author Info
Boot, Arnoud W A
Thakor, Anjan

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Abstract

We develop an economic theory of ‘flexibility’, which we interpret as the discretion or ability to make a decision that others disagree with. We show that flexibility is essentially an option for the decision-maker, and can be valued as such. The value of the flexibility option is decreasing in the extent to which the decision-maker’s future decision-relevant opinion is correlated with the opinions of others who may be able to impede the decision. We argue that flexibility drives economic decisions in a significant way. The applications we consider are: the entrepreneur’s choice of flexibility in the initial mix of financing raised; the use of flexibility to understand differences in security design and the firm’s security-issuance decision; the impact of flexibility on the use of collateral in lending; the role of flexibility in capital budgeting decisions; the effect of flexibility considerations in the design of contracts in a principal-agent setting; the interpretation of ‘power’ and conformity in organizations in the context of flexibility; and the choice between private and public ownership in the context of flexibility.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3709.

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Date of creation: Jan 2003
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Handle: RePEc:cpr:ceprdp:3709

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Related research
Keywords: corporate finance; Managerial decision-making;

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arnoud W.A. Boot & Anjan V. Thakor, 2003. "Disagreement and Flexibility: A Theory of Optimal Security Issuance and Capital Structure," Tinbergen Institute Discussion Papers 03-001/2, Tinbergen Institute. [Downloadable!]
    Other versions:
  2. Massimo Omiccioli, 2005. "Trade Credit as Collateral," Temi di discussione (Economic working papers) 553, Bank of Italy, Economic Research Department. [Downloadable!]
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