Investment Busts, Reputation, and the Temptation to Blend in with the Crowd

Steven Grenadier, Andrey Malenko and Ilya Strebulaev ()

No 17945, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide a dynamic model of an industry in which agents strategically time liquidation decisions in an effort to protect their reputations. As in traditional models, agents delay liquidation attempting to signal their quality. However, when the industry faces a common shock that indiscriminately forces liquidation of a subset of projects, agents with bad enough projects choose to liquidate even if their projects are unaffected by the shock. Such "blending in with the crowd" creates an additional incentive to delay liquidation, further amplifying the shock. As a result, even minuscule common shocks can be evidenced by massive liquidations. As agents await common shocks, the industry accumulates "living dead" projects. Surprisingly, the potential for moderate negative common shocks often improves agents values.

JEL-codes: G01 G24 G31 G32 G33 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-bec, nep-cta, nep-dge and nep-ppm
Note: CF PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Investment, Reputation, and the Temptation to Blend in with the Crowd (co-authored with Steven R. Grenadier and Andrey Malenko) Journal of Financial Economics, 2014, 111, 137-157

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