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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Optimal exercise of jointly held real options
T2 - a Nash bargaining approach with value diversion
AU - Banerjee, Shantanu
AU - Gucbilmez, Ufuk
AU - Pawlina, Grzegorz
PY - 2014/12/1
Y1 - 2014/12/1
N2 - This paper provides a two-stage decision framework in which two or more parties exercise a jointly held real option. We show that a single party’s timing decision is always socially efficient if it precedes bargaining on the terms of sharing. However, if the sharing rule is agreed before the exercise timing decision is made, then socially optimal timing is attained only if there is a cash payment element in the division of surplus. If the party that chooses the exercise timing can divert value from the project, then the first-best outcome may not be possible at all and the second-best outcome may be implemented using a contract that is generally not optimal in the former cases. Our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance.
AB - This paper provides a two-stage decision framework in which two or more parties exercise a jointly held real option. We show that a single party’s timing decision is always socially efficient if it precedes bargaining on the terms of sharing. However, if the sharing rule is agreed before the exercise timing decision is made, then socially optimal timing is attained only if there is a cash payment element in the division of surplus. If the party that chooses the exercise timing can divert value from the project, then the first-best outcome may not be possible at all and the second-best outcome may be implemented using a contract that is generally not optimal in the former cases. Our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance.
KW - Decision analysis
KW - Investment timing
KW - Real options
KW - Nash bargaining solution
KW - Agency problem
U2 - 10.1016/j.ejor.2014.06.004
DO - 10.1016/j.ejor.2014.06.004
M3 - Journal article
VL - 239
SP - 565
EP - 578
JO - European Journal of Operational Research
JF - European Journal of Operational Research
SN - 0377-2217
IS - 2
ER -