We model a firm’s optimal capital structure decision in a framework in which it may later choose to enter either Chapter 11 reorganization or Chapter 7 liquidation. Creditors anticipate equityholders’ ex-post reorganization incentives and price them into the ex-ante credit spreads. Using a realistic dynamic bargaining model of reorganization, we show that the off-equilibrium threat of costly renegotiation can lead to lower leverage, even with liquidation in equilibrium. If reorganization is less efficient than liquidation, the added option of reorganization can actually make equityholders worse off ex-ante, even when they liquidate on the equilibrium path.

We study games in which the decision to exercise an option is a signal of private information to outsiders, whose beliefs affect the utility of the decision-maker. Signaling incentives distort the timing of exercise, and the direction of distortion depends on whether the decision-maker's utility increases or decreases in outsiders' belief about the payoff from exercise. In the former case, signaling incentives erode the value of the option to wait and speed up option exercise, while in the latter case option exercise is delayed. We demonstrate the model's implications through four corporate finance settings: investment under managerial myopia, venture capital grandstanding, investment under cash flow diversion, and product market competition.

[We study games in which the decision to exercise an option is a signal of private information to outsiders, whose beliefs affect the utility of the decision-maker. Signaling incentives distort the timing of exercise, and the direction of distortion depends on whether the decision-maker's utility increases or decreases in outsiders' belief about the payoff from exercise. In the former case, signaling incentives erode the value of the option to wait and speed up option exercise, while in the latter case option exercise is delayed. We demonstrate the model's implications through four corporate finance settings: investment under managerial myopia, venture capital grandstanding, investment under cash flow diversion, and product market competition.]

This paper develops a model of the optimal investment strategy for a firm confronted with a sequence of technological innovations. We incorporate many of the most important characteristics of real-world technology markets. For example, we permit innovations to be stochastic in their arrival times and their profitability. We also incorporate learning so that firms adopting current innovations become better able to benefit from future innovations. The model yields four distinct investment strategies. The model is then used to predict actual firm policy. These implications are discussed and compared with observed firm behavior.

ABSTRACT Traditional real options models demonstrate the importance of the “option to wait” due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional “option to learn.” The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows.

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affects the agent's ability to credibly communicate information. When the agent favors late decision making, full information revelation often occurs. In this case, centralized decision making, where the principal retains authority and communicates with the agent, implements the optimal decision-making rule. When the agent favors early decision making, communication is partial, and the optimal decision-making rule is not implemented. Delegation adds value when the bias is for early decision making, but not for late decision making. (JEL D21, D23, D82, D83)

This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The implied investment behavior differs significantly from that of the first-best no-agency solution. In particular, greater inertia occurs in investment, as the model predicts that the manager will have a more valuable option to wait than the owner.

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.

We model a dynamic economy with strategic complementarity among investors and study how endogenous government interventions mitigate coordination failures. We establish equilibrium existence and uniqueness, and we show that one intervention can affect another through altering the public information structure. A stronger initial intervention helps subsequent interventions through increasing the likelihood of positive news, but also leads to negative conditional updates. Our results suggest optimal policy should emphasize initial interventions when coordination outcomes tend to correlate. Neglecting informational externalities of initial interventions results in over- or under-interventions. Moreover, saving smaller funds disproportionally more can generate greater informational benefits at smaller costs.