Bart M. Lambrecht

Real options and preemption under incomplete information

Abstract This paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions. The optimal investment strategy may lie anywhere between the zero-NPV trigger level and the optimal strategy of a monopolist, depending on the distribution of competitors’ costs and the implied fear of preemption. Our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness.

Preemptive patenting under uncertainty and asymmetric information

This paper examines the investment behaviour of an incumbent and a potential entrant that are competing for a patent with a stochastic payoff. We incorporate asymmetric information into the model by assuming that the challenger has complete information about the incumbent whereas the latter does not know the precise value of its opponent’s investment cost. We find that even a small probability of being preempted gives the informationally-disadvantaged firm an incentive to invest at the breakeven point where it is indifferent between investing and being preempted. By investing inefficiently early to protect its market share, the incumbent gives up not only its option to delay the investment, but also reduces the value of the firm by an amount that increases with the investment cost incurred and the potential loss of market share.

Time to default in the UK mortgage market

Abstract This paper employs duration analysis to investigate the timing of default in the UK mortgage market. Our analysis is performed on an ex ante basis, in that our explanatory variables are available to mortgage lenders when the loan is first made. We estimate both standard Weibull distributions and generalizations of the Weibull that permit non-monotonic hazard functions. The models fit the data well, suggesting that we have captured the major sources of variation in duration. We find that ‘cash flow’ variables, such as salary and interest rate paid, play the largest role. Surprisingly, loan-to-value ratios are either insignificant or influence default times in a counter-intuitive direction.

Mortgage Default and Possession Under Recourse: A Competing Hazards Approach

Recent studies by Ambrose, Buttimer, and Capone have stressed the fact that lender and borrower decisions after the initial default on amortgage may significantly affect the amount and timing of recoveries and hence, more broadly, the value and riskiness of mortgage loan portfolios. This study uses microeconomic data from the UK to examine the timing decisions of mortgage lenders and borrowers when mortgages are in default. The results suggest that salary and interest rates influence timing decisions more than loan-to-value ratios do and that lenders and borrowers accelerate the resolution of delinquent mortgages as the economic climate deteriorates.

A Theory of Net Debt and Transferable Human Capital

Traditional theories of capital structure do not explain the puzzling phenomena of zero-leverage firms and negative net debt ratios. We develop a theory where firms adopt a net debt target that acts as a balancing variable between equityholders and managers. Negative (positive) net debt occurs in human (physical) capital intensive industries. Negative net debt arises because tradeable claims cannot be issued against transferable human capital. Heterogeneity in capital structure occurs when firms have debt that is not fully collateralized. Physical capital intensive firms take on high leverage but may underlever to avoid bankruptcy costs. This creates excess rents for managers (even if the supply of human capital is competitive) because wealth constraints prevent managers from co-investing.

Creditor races and contingent claims

Abstract Recent research has begun the task of integrating contingent claims analysis with modern corporate finance by incorporating strategic behaviour in dynamic models of corporate security valuation. This paper reports on and illustrates these developments by presenting a simple pricing model in which two debt-holders with incomplete information about each others type decide when to foreclose on a financially-distressed firm.

The Dynamics of Investment, Payout and Debt

We present a dynamic agency model of investment, borrowing and payout decisions by a mature corporation operating in perfect financial markets. Risk-averse managers implement an inter-temporal strategy that maximizes their lifetime utility of managerial rents. They under-invest and smooth payout and rents. Debt is the shock-absorber for operating income and investment. Managers do not rebalance capital structure, so shocks to debt levels persist. Managers implement precautionary savings by paying down debt, even when interest is tax-deductible. We generate empirical predictions that differ from conventional agency models and from dynamic models based on financing frictions.

Household Liquidity and Incremental Financing Decisions: Theory and Evidence

In this paper we develop a stochastic model for household liquidity. In the model, the optimal liquidity policy takes the form of a liquidity range. Subsequently, we use the model to calibrate the upper bound of the predicted liquidity range. Equipped with knowledge about the relevant control barriers, we run a series of empirical tests on a panel data set of Dutch households covering the period 1992-2007. The results broadly validate our theoretical predictions that households i) exhaust most of their short-term liquid assets prior to increasing net debt, and ii) reduce outstanding net debt at the optimally selected upper liquidity barrier. However, a small minority of households appears to act sub-optimally. Poor and vulnerable households rely too frequently on expensive forms of credit (such as overdrafts) hereby incurring substantial amounts of fees and fixed borrowing costs. Elderly households and people on social benefits tend to accumulate too much liquidity. Finally, some households take on expensive short-term credit while having substantial amounts of low-yielding liquid assets.

Household Liquidity and Incremental Financing Decisions: Theory and Evidence: HOUSEHOLD LIQUIDITY AND FINANCING DECISIONS

In this paper we develop a stochastic model for household liquidity. In the model, the optimal liquidity policy takes the form of a liquidity range. Subsequently, we use the model to calibrate the upper bound of the predicted liquidity range. Equipped with knowledge about the relevant control barriers, we run a series of empirical tests on a panel data set of Dutch households covering the period 1992�?2007. The results broadly validate our theoretical predictions that households (i) exhaust most of their short�?term liquid assets prior to increasing net debt, and (ii) reduce outstanding net debt at the optimally selected upper liquidity barrier. However, a small minority of households appear to act sub�?optimally. Poor and vulnerable households rely too frequently on expensive forms of credit (such as overdrafts) hereby incurring substantial amounts of fees and fixed borrowing costs. Elderly households and people on social benefits tend to accumulate too much liquidity. Finally, some households take on expensive short�?term credit while having substantial amounts of low�?yielding liquid assets.