Grzegorz Pawlina

• Lancaster University

We develop a dynamic model of a firm in which cash management is partially delegated to a self-interested manager. Shareholders trade off the cost of dismissing the manager with the cost of managerial discretion over the use of liquid funds. An improvement in corporate governance quality may have a positive or a negative effect on levels and values...

We present a real options model of a firm’s make-or-buy decision under demand uncertainty. “Making” is subject to decreasing returns to scale, fixed costs, and capital investment. “Buying” happens at a fixed price and requires no investment. Three distinct procurement regimes endogenously arise: buying, making, or concurrent sourcing for, respectiv...

We model the dynamics of going public within an IPO wave. The model predicts that firms with better growth opportunities can find it optimal to go public early and accept underpricing of their issues to signal quality. Data supports this prediction as, on average, early movers underprice their issues significantly more and we show that leaders (ear...

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 t...

This paper examines the cyclical nature of IPO activity in the UK. The results indicate a lead-lag relationship between IPO initial returns and volume. IPO volume is sensitive to recent changes in market conditions. There is evidence of industry concentration in hot markets, and firms raise more equity during these periods. Overall, IPO waves in th...

We model the make-or-buy decision of a firm that faces demand uncertainty. The firm's average cost curve is U-shaped under internal production ("making") and constant under outsourcing ("buying"). Internal production requires investment in capacity. Up to three distinct procurement regimes endogenously arise: buying, making or concurrent sourcing f...

This paper studies the determinants and behavior of outstanding mortgage loan-to-value (LTV) ratios for a panel of 5,179 households in the pre-mortgage crisis period 1992-2005. We find that outstanding LTVs are driven by household characteristics, life-cycle effects and mortgage type characteristics. LTV declines with the time elapsed since mortgag...

Corporate governance has long been demonstrated to affect corporate cash holdings. Still, the evidence of the direction of the relationship is at best mixed. In this paper, we disentangle two key aspects of corporate governance: monitoring and managerial entrenchment, which affect its quality in opposite directions. We develop a model of delegated...

Traditional theories of capital structure do not explain the puzzling phenomena of zero-leverage firms and negative net debt ratios. We develop a theory where firms adopt a net debt target that acts as a balancing variable between equityholders and managers. Negative (positive) net debt occurs in human (physical) capital intensive industries. Negat...

In this paper we develop a stochastic model for household liquidity. In the model, the optimal liquidity policy takes the form of a liquidity range. Subsequently, we use the model to calibrate the upper bound of the predicted liquidity range. Equipped with knowledge about the relevant control barriers, we run a series of empirical tests on a panel...

In this paper we develop a stochastic model for household liquidity. In the model, the optimal liquidity policy takes the form of a liquidity range. Subsequently, we use the model to calibrate the upper bound of the predicted liquidity range. Equipped with knowledge about the relevant control barriers, we run a series of empirical tests on a panel...

We analyze the optimal investment strategy of a firm that can complete a project either in one stage at a single freely chosen time point or in incremental steps at distinct time points. The presence of economies of scale gives rise to the following trade-off: lumpy investment has a lower total cost, but stepwise investment gives more flexibility b...

This paper models the choice between outsourcing and integration for a firm that faces price uncertainty in both the upstream and downstream market. The firm can outsource the production of some input at an exogenous, stochas-tic price or it can produce the input internally at an average cost of production that is U-shaped. Up to three different pr...

In this paper we study the effects of demand uncertainty and imperfect competition on market entry and product quality choice. We allow for either fixed or flexible quality. Under a fixed quality choice, the follower chooses a higher quality provision. Quality is shown to generally increase with the volatility of demand. The strategic quality choic...

We model an entrepreneur’s choice between a loan commitment and a spot loan. The former type of loan precedes, and the latter type follows his investment timing decision. We find that the entrepreneur prefers the former when his bargaining power is small and his equity stake in the investment is large, and the latter otherwise. The spot loan yields...

This paper discusses the housing market in the Netherlands. Our study benefits from access to the DNB household survey (formerly known as CentER Savings Survey) and analyzes a panel dataset of 8867 households over the period 1992-2005.

This paper shows that shareholders' option to renegotiate debt in a period of fi-nancial distress exacerbates Myers' (1977) underinvestment problem at the time of the firm's expansion. This result is a consequence of a higher wealth trans-fer from shareholders to creditors occurring upon investment in the presence of the option to renegotiate. This...

This paper analyzes the impact of investment cost asymmetry on the optimal real option exercise strategies and the value of firms in duopoly. Both firms have an opportunity to invest in a project enhancing ( ceteris paribus) the profit flow. We show that three types of equilibrium strategies exist. Furthermore, we express the critical levels of cos...

"This paper analyzes the impact of investment cost asymmetry on the optimal real option exercise strategies and the value of firms in duopoly. Both firms have an opportunity to invest in a project enhancing ( ceteris paribus ) the profit flow. We show that three types of equilibrium strategies exist. Furthermore, we express the critical levels of c...

This paper shows that shareholders' option to renegotiate debt in a period of financial distress exacerbates Myers' (1977) underinvestment problem at the time of the firm's expansion. This result is a consequence of a higher wealth transfer from shareholders to creditors occurring upon investment in the presence of the option to renegotiate. This a...

This paper is about the optimal entry strategy in a new product market. Some firms enter new markets by committing the sunk cost up-front and immediately investing at full scale. Other companies start out more cautiously by undertaking market research first (e.g. based on a pilot launch). In the latter case, the idea is to gain information on the d...

We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive. Is this suboptimal investment policy the result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the...

The non-exclusivity of real options for individual firms and the growing importance of strategic interactions have given rise to a research field that is situated on the intersection of real options theory and game theory. This paper provides an overview of the state of the art of game theoretic real options models.

We analyze the investment decision of a firm that may complete a project either in one lump or in smaller parts at distinct points in time. The firm faces a trade-off between the cost savings that arise when the project is completed in one go and the additional flexibility that arises when the firm is able to respond to resolving uncertainty by cho...

We analyze the investment decision of a firm that has an option to complete an investment project either in one lump or in two smaller parts at distinct points in time. The firm faces a trade-off between the cost savings that arise when the project is completed at once and the additional flexibility that arises when the firm is able to respond to r...

In this paper the impact of product market uncertainty on the optimal replacement timing of a production facility is studied. The existing production facility can be replaced by a technologically more advanced and thus more cost-effective one. We take into account strategic interactions among the firms competing in the product market by analyzing t...

The analysis of the effect of uncertainty is underdeveloped in the field of industrial organization. This paper shows how the theory of strategic real option can fill this gap. Symmetric mixed strategies are used to analyze standard models. Extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are presented.

Corporate investment opportunities can be represented as a set of (real) options to acquire productive assets. Identification of the optimal exercise strategies for these options plays a crucial role in improving the quality of capital budgeting decisions and, as a consequence, in maximizing shareholders¿ wealth. Structural changes in the economic...

In this paper the impact of a policy change on the investment behavior of the firm is studied in an incomplete information setting. The policy change occurs when a stochastic process describing the state of the economic environment reaches a certain trigger. The firm has incomplete information about the trigger and knows only its probability distri...

In this paper the advantages of flexibility of quality choice are studied in a real option framework. Before firms can decide about quality they first have to incur a sunk cost investment in order to enter the market. Flexibility of quality induces (ceteris paribus) earlier investment, and the value of being able to adjust quality over time increas...

Existing real options literature provides relatively little insight into the impact of structural changes of the economic environment on the investment decision of the firm. We propose a method to model the impact of a policy change on investment behavior in which, contrary to the earlier models based on Poisson processes, uncertainty concerning th...

Abstract Despite many past papers concerning a …rm’s capital structure, the valuation of debt and equity and cost of capital, there are few that explicitly codify contingent sharing rules for the …rm’s cash‡ow over time. We motivate equity and debt valuation by modeling,tax and distress costs using cap and ‡oor technology as well as a default optio...