Informational role of investment and liquidation values

We develop a credit-risk model to study the informational role of investment in an economy susceptible to large liquidity shocks. Firms' investment decisions carry information about their asset quality, thereby mitigating informational frictions when firms enter bankruptcy. An increase in aggre...

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Bibliographic Details
Published inSeonmul yeongu (Online) Vol. 32; no. 3; pp. 238 - 263
Main Authors Doh, Hyun Soo, Wang, Yiyao
Format Journal Article
LanguageEnglish
Published Bingley Emerald Group Publishing Limited 08.08.2024
Emerald Publishing
한국파생상품학회
Subjects
Asset allocation
Asymmetry
Bankruptcy
Cash flow forecasting
Credit ratings
Debt overhang
Default
Information asymmetry
Investment
Liquidation values
Liquidity
Losses
Net present value
Ratings & rankings
경영학
Online AccessGet full text
ISSN1229-988X
2713-6647
2713-6647
1229-988X
DOI10.1108/JDQS-02-2024-0007

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Summary:We develop a credit-risk model to study the informational role of investment in an economy susceptible to large liquidity shocks. Firms' investment decisions carry information about their asset quality, thereby mitigating informational frictions when firms enter bankruptcy. An increase in aggregate investment can reduce the informational value of investment, depressing firms' recovery values. Therefore, policies boosting investment can decrease debt and firm values by reducing the informational value of investment. The presence of debt overhang may enhance firm value by making firms' investment decisions more informative. We present suggestive empirical evidence consistent with model predictions on the relation between firms' investments and recovery rates.
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ISSN:1229-988X
2713-6647
2713-6647
1229-988X
DOI:10.1108/JDQS-02-2024-0007