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Last Resort Gambles, Risky Debt and Liquidation Policy

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Listed author(s):
  • 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 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
Handle: RePEc:bol:bodewp:577
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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; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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Cited by:

  1. Jin Cheng & Meixing Dai & Frédéric Dufourt, 2015. "The banking crisis with interbank market freeze," Working Papers of BETA 2015-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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