Option to Abandon, Syndication and Investment Return

44 Pages Posted: 31 Dec 2019 Last revised: 30 Mar 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: March 19, 2020

Abstract

In contrast to the standard results, we show that investment reversibility and increased volatility of the option to abandon do not increase investment returns for a lumpy project with multiple investors. Increasing an investor's commitment augments the likelihood of project success and exerts a positive externality on other investors' welfare. These effects also imply that the optimal number of investors is either large or small. Using private equity data, we support the model and find a convex relationship between investment performance and syndicate size. Our results 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 (March 19, 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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