Last Resort Gambles, Risky Debt and Liquidation Policy

Elettra Agliardi () and Rainer Andergassen ()

Working Paper Series from Rimini Centre for Economic Analysis

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.

Keywords: Last resort gambles; risky investments; liquidation policy; real options. (search for similar items in EconPapers)
JEL-codes: G3 G32 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2007-07, Revised 2007-07

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http://www.rcfea.org/RePEc/pdf/wp31_07.pdf

Related works:
Working Paper: Last Resort Gambles, Risky Debt and Liquidation Policy (2006)
Journal Article: Last resort gambles, risky debt and liquidation policy (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:rim:rimwps:31-07

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