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.
|Number of pages||6|
|Journal||Investment Management and Financial Innovations|
|Publication status||Published - 1 Jan 2014|
- Asset sales
- First passage time
- Real options