Option to Abandon, Syndication and Investment Return

47 Pages Posted: 31 Dec 2019 Last revised: 2 Dec 2020

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Stefano Bonini

Stevens Institute of Technology - School of Business

Thorsten Janus

University of Wyoming

Date Written: November 29, 2020

Abstract

In this paper we propose a model showing that in large projects syndicated by multiple investors project irreversibility and decreased volatility of the option to abandon increase investment returns. This result stems from the investors' commitment that augments the likelihood of project success and exerts a positive externality on other investors' welfare. This effect implies that the optimal number of investors is convex. We test this prediction looking at the ideal setting of private equity buyouts that are economically relevant and heterogenously syndicated. Our results strongly support our model and have important implications in the debate on the public to private asset allocation shift.

Keywords: Abandonment Option, Lumpy Projects, Syndicate Size, Return on Investment, Firm Performance

JEL Classification: G23, G32, G34

Suggested Citation

Banerjee, Suman and Bonini, Stefano and Janus, Thorsten, Option to Abandon, Syndication and Investment Return (November 29, 2020). Available at SSRN: https://ssrn.com/abstract=3501141 or http://dx.doi.org/10.2139/ssrn.3501141

Suman Banerjee

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Thorsten Janus

University of Wyoming ( email )

Box 3434 University Station
Laramie, WY 82070
United States

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