Last Resort Gambles, Risky Debt and Liquidation Policy

Elettra Agliardi and Rainer Andergassen

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

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.

Date: 2006-11
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Related works:
Journal Article: Last resort gambles, risky debt and liquidation policy (2009)
Journal Article: Last resort gambles, risky debt and liquidation policy (2009)
Working Paper: Last Resort Gambles, Risky Debt and Liquidation Policy (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:577

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