Asset sales when resale price is uncertain

Shumei Gao, Jihe Song, Zhengying Luo

    Research output: Contribution to journalArticle

    Abstract

    This paper develops an asset sale model where resale price follows a geometric Brownian motion. It derives a valuation formula for the value of the resale option and obtains the optimal option exercise rule. In addition, analytic measures of the probability of the option exercise are presented and some comparative static results are discussed. The model is shown to have applications to voluntary liquidations and mark-up pricing in mergers and acquisitions. It also throws light on option exercise behavior in real option models.

    Original languageEnglish
    Pages (from-to)54-59
    Number of pages6
    JournalInvestment Management and Financial Innovations
    Volume11
    Issue number4
    Publication statusPublished - 1 Jan 2014

    Keywords

    • Asset sales
    • First passage time
    • Real options

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