Option to Abandon, Syndication and Investment Return

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