Strategic Decision Analyses Of Financially Distressed Enterprise Based On Growth Option

In this paper, on the background of uncertainties of enterprises' future managementand development, the optimal investment, liquidation and renegotiation policies offinancially distressed enterprises are studied based on the growth options. Moreover,various kinds of options existing in enterprises have been considered respectively byusing the theoretical methods of real options, thus a model that handles the decisionquestions of financially distressed enterprises has been constructed, whose mainobjectives are to quantitatively investigate the impacts of the renegotiation options,distribution of bargaining power and indirect bankruptcy costs onthe optimal investmentand liquidation policies of enterprises, particularly, the impacts of those debtcharacteristics on the magnitudes of under-investment problems and the impacts of agrowth opportunity on the optimal bankruptcyand renegotiation timing. As a conclusion of this analysis, the optimal investment and liquidation polices ofenterprises are affected by the capital structures of themselves. Firstly, the growthoptions deferred the liquidation while the presence of debt financing hindered theexecution of growth options. Meanwhile, the possibilities of renegotiating the originaldebt contracts deteriorated Myers' under-investment problems because of the higherwealth transfer to debtholders upon investment in the presence of the renegotiationoptions. Thirdly, liquidation policies differed from debt financing and all-equityfinancing, that is, debt reconstruction can not remove the whole bankruptcy costs.Fourthly even ignoring the influences of the tax shields, liquidation policies are stillaffected by the second-best investment policies, which leading to the inefficientbankruptcy earlier. Finally, when shareholders have enough bargaining power,shareholders is prone to the strategic default of original debt contracts on the conditionsof debt reconstruction.