Strategic Liquidation of a Limited Liability Firm

43 Pages Posted: 6 Feb 2015 Last revised: 24 Feb 2015

See all articles by Jamie Alcock

Jamie Alcock

The University of Sydney Business School; Centre for International Finance and Regulation (CIFR)

James Peter Brotchie

University of Queensland - Business School

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Date Written: February 4, 2015

Abstract

The decision of whether a firm should voluntarily liquidate, rather than continue trading, is a function of many parameters including uncertain future earnings, asset depreciation, and the firm's cost-of-debt. We develop an equity valuation model derived from the fundamental accounting equation that treats equity as an Asian-style call option on net earnings. Using this model we identify the firm's optimal voluntary liquidation rule and calculate this rule's sensitivity to key accounting variables. While expected rates of EBITDA growth, cost-of-debt and accounting depreciation are all important variables, we find that the volatility of EBITDA yield is the dominant determinant of the optimal voluntary liquidation rule. Interestingly, we find that firms holding assets with low liquidation costs should wind-up earlier. Our model predicts many commonly observed empirical voluntary liquidation behaviours and also predicts situations where managers interests are misaligned with those of equityholders.

Keywords: Voluntary liquidation, stochastic earnings model, American-Asian option

JEL Classification: G13, G32, G33

Suggested Citation

Alcock, Jamie and Brotchie, James Peter and Gray, Stephen, Strategic Liquidation of a Limited Liability Firm (February 4, 2015). Available at SSRN: https://ssrn.com/abstract=2560260 or http://dx.doi.org/10.2139/ssrn.2560260

Jamie Alcock (Contact Author)

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

James Peter Brotchie

University of Queensland - Business School ( email )

Colin Clark Building (#39)
The University of Queensland
Brisbane, Queensland 4072
Australia
+61422015622 (Phone)

Stephen Gray

University of Queensland - Business School ( email )

University of Queensland
Brisbane, Queensland 4072
Australia

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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