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Last Resort Gambles, Risky Debt and Liquidation Policy

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  • Elettra Agliardi

    ()
    (University of Bologna and The Rimini Centre for Economics Analysis, Italy.)

  • Rainer Andergassen

    ()
    (University of Bologna)

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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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 31-07.

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Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:rim:rimwps:31-07

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Keywords: Last resort gambles; risky investments; liquidation policy; real options.;

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