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Investment busts, reputation, and the temptation to blend in with the crowd

Author(s)
Grenadier, Steven R.; Malenko, Andrey; Strebulaev, Ilya A.
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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
Date issued
2013-09
URI
http://hdl.handle.net/1721.1/114035
Department
Sloan School of Management
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
ISSN
0304-405X
1879-2774

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