Investment busts, reputation, and the temptation to blend in with the crowd
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Malenko_Investment busts.pdf
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340.97 KB
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Checksum (MD5)
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Author(s)
Grenadier, Steven R.
Malenko, Andrey
Strebulaev, Ilya A.
Date Issued
September 2013
Journal
Journal of Financial Economics
Publisher
Elsevier
Citation
Grenadier, Steven R. et al. “Investment Busts, Reputation, and the Temptation to Blend in with the Crowd.” Journal of Financial Economics 111, 1 (January 2014): 137–157 © 2013 Elsevier B.V.
Version
Author's final manuscript
Abstract
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. Keywords: abandonment; real options; signaling; asymmetric information; reputation
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/J.JFINECO.2013.09.002
