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Informational role of investment and liquidation valuesopen access
- Authors
- Doh, Hyun Soo; Wang, Yiyao
- Issue Date
- May-2024
- Publisher
- Emerald Publishing
- Keywords
- Debt overhang; Information asymmetry; Investment; Liquidation values
- Citation
- Journal of Derivatives and Quantitative Studies, pp 1 - 26
- Pages
- 26
- Indexed
- SCOPUS
KCI
- Journal Title
- Journal of Derivatives and Quantitative Studies
- Start Page
- 1
- End Page
- 26
- ISSN
- 1229-988X
2713-6647
- Abstract
- We develop a credit-risk model to study the informational role of investment in an economy susceptible to large liquidity shocks. Firms' investment decisions carry information about their asset quality, thereby mitigating informational frictions when firms enter bankruptcy. An increase in aggregate investment can reduce the informational value of investment, depressing firms' recovery values. Therefore, policies boosting investment can decrease debt and firm values by reducing the informational value of investment. The presence of debt overhang may enhance firm value by making firms' investment decisions more informative. We present suggestive empirical evidence consistent with model predictions on the relation between firms' investments and recovery rates. © 2024, Hyun Soo Doh and Yiyao Wang.
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Related Researcher
- Doh, Hyun Soo
- COLLEGE OF BUSINESS AND ECONOMICS (DIVISION OF BUSINESS ADMINISTRATION)