Investment busts, reputation, and the temptation to blend in with the crowd

Steven R. Grenadier, Andrey Malenko and Ilya A. Strebulaev

Journal of Financial Economics, 2014, vol. 111, issue 1, 137-157

Abstract: We provide a real-options model of an industry in which agents time abandonment of their projects in an effort to protect their reputations. Agents delay abandonment attempting to signal quality. When a public common shock forces abandonment of a small fraction of projects irrespective of agents' quality, many agents abandon their projects strategically even if they are unaffected by the shock. Such “blending in with the crowd” effect creates an additional incentive to delay abandonment ahead of the shock, leading to accumulation of “living dead” projects, which further amplifies the shock. The potential for moderate public common shocks often improves agents' values.

Keywords: Abandonment; Real options; Signaling; Asymmetric information; Reputation (search for similar items in EconPapers)
JEL-codes: D81 D82 G31 G33 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:111:y:2014:i:1:p:137-157

DOI: 10.1016/j.jfineco.2013.09.002

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