Informational role of investment and liquidation values

Hyun Soo Doh and Yiyao Wang

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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Year of publication:	2024
Authors:	Doh, Hyun Soo ; Wang, Yiyao
Published in:	Journal of derivatives and quantitative studies : Seonmul yeongu. - Bingley, United Kingdom : Emerald Publishing Services, ISSN 2713-6647, ZDB-ID 3064233-4. - Vol. 32.2024, 3, p. 238-263
Subject:	Debt overhang \| Information asymmetry \| Investment \| Liquidation values \| Asymmetrische Information \| Asymmetric information \| Betriebliche Liquidität \| Corporate liquidity \| Investition \| Theorie \| Theory \| Liquidation \| Investitionsentscheidung \| Investment decision