Last resort gambles, risky debt and liquidation policy

Elettra Agliardi and Rainer Andergassen

Review of Financial Economics, 2009, vol. 18, issue 3, 142-155

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 may 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. It is shown that last resort gambles delay liquidation. We study how the liquidation trigger and the last resort investment decisions are affected by the firm's capital structure.

Date: 2009
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https://doi.org/10.1016/j.rfe.2009.04.001

Related works:
Journal Article: Last resort gambles, risky debt and liquidation policy (2009)
Working Paper: Last Resort Gambles, Risky Debt and Liquidation Policy (2007)
Working Paper: Last Resort Gambles, Risky Debt and Liquidation Policy (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:18:y:2009:i:3:p:142-155

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