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Last Resort Gambles, Risky Debt and Liquidation Policy

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Author Info
Elettra Agliardi () (University of Bologna and The Rimini Centre for Economics Analysis, Italy.)
Rainer Andergassen () (University of Bologna)

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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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Publisher Info
Paper provided by 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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Related research
Keywords: Last resort gambles risky investments liquidation policy real options.

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Find related papers by JEL classification:
G3 - Financial Economics - - Corporate Finance and Governance
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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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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    Other versions:
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  12. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer. [Downloadable!] (restricted)
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