Investment Busts, Reputation, and the Temptation to Blend in with the Crowd
We provide a dynamic model of an industry in which agents strategically time liquidation decisions in an effort to protect their reputations. As in traditional models, agents delay liquidation attempting to signal their quality. However, when the industry faces a common shock that indiscriminately f...
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| Veröffentlicht in: | NBER Working Paper Series 2012-03, p.17945 |
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| creator | Strebulaev, Ilya A Malenko, Andrey Grenadier, Steven |
| description | We provide a dynamic model of an industry in which agents strategically time liquidation decisions in an effort to protect their reputations. As in traditional models, agents delay liquidation attempting to signal their quality. However, when the industry faces a common shock that indiscriminately forces liquidation of a subset of projects, agents with bad enough projects choose to liquidate even if their projects are unaffected by the shock. Such "blending in with the crowd" creates an additional incentive to delay liquidation, further amplifying the shock. As a result, even minuscule common shocks can be evidenced by massive liquidations. As agents await common shocks, the industry accumulates "living dead" projects. Surprisingly, the potential for moderate negative common shocks often improves agents values. |
| doi_str_mv | 10.3386/w17945 |
| format | Article |
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| source | NBER Working Papers; Alma/SFX Local Collection |
| subjects | Business failures Corporate Finance Economic theory Entrepreneurs Equity funds General partners Incentives Liquidation Loans Productivity, Innovation, and Entrepreneurship Recessions Reputation management Reputations Strategic planning Studies Venture capital |
| title | Investment Busts, Reputation, and the Temptation to Blend in with the Crowd |
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