Optimal exercise of jointly held real options: a Nash bargaining approach with value diversion

Banerjee, S., Gucbilmez, U. and Pawlina, G. (2014) Optimal exercise of jointly held real options: a Nash bargaining approach with value diversion. European Journal of Operational Research, 239(2), pp. 565-578. (doi: 10.1016/j.ejor.2014.06.004)

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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.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Gucbilmez, Dr Ufuk
Authors: Banerjee, S., Gucbilmez, U., and Pawlina, G.
College/School:College of Social Sciences > Adam Smith Business School > Management
Journal Name:European Journal of Operational Research
ISSN (Online):1872-6860
Published Online:17 June 2014
Copyright Holders:Copyright © 2014 Elsevier B.V
First Published:First published in European Journal of Operational Research
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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