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Last Resort Gambles, Risky Debt and Liquidation Policy

  • E. Agliardi
  • R. Andergassen

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 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. We show that last resort gamble strategies boost the company’s value, delaying liquidation. We study how the liquidation and the last resort gamble strategies are affected by the firm’s 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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  8. Agliardi, Elettra & Agliardi, Rossella, 2009. "Progressive taxation and corporate liquidation: Analysis and policy implications," Journal of Policy Modeling, Elsevier, vol. 31(1), pages 144-154.
  9. Patrick Bolton & Jose Scheinkman & Wei Xiong, 2005. "Pay for Short-Term Performance: Executive Compensation in Speculative," Levine's Bibliography 666156000000000673, UCLA Department of Economics.
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  12. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," NBER Working Papers 9813, National Bureau of Economic Research, Inc.
  13. Décamps, Jean Paul & Faure-Grimaud, Antoine, 2000. "Excessive continuation and Dynamic Agency Costs of Debt," CEPR Discussion Papers 2504, C.E.P.R. Discussion Papers.
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  24. Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
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  26. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  27. Agliardi, Elettra & Agliardi, Rossella, 2008. "Progressive taxation and corporate liquidation policy," Economic Modelling, Elsevier, vol. 25(3), pages 532-541, May.
  28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  29. Ondrej Knot & Ondrej Vychodil, 2006. "Bankruptcy Regimes and Gambling on Resurrection," CERGE-EI Working Papers wp290, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
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