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The Economic Value of Flexibility when there is Disagreement

Author

Listed:
  • Arnoud W.A. Boot

    (Faculty of Economics and Econometrics, University of Amsterdam)

  • Anjan V. Thakor

    (University of Michigan Business School)

Abstract

We develop an economic theory of “flexibility”, which we interpret as the discretion orability to make a decision that others disagree with. We show that flexibility is essentiallyan option for the decisionmaker, and can be valued as such. The value of the flexibilityoption is decreasing in the extent to which the decisionmaker’s future decision-relevantopinion is correlated with the opinions of others who may be able to impede the decision.We argue that flexibility drives economic decisions in a significant way. Theapplications we consider are: the entrepreneur’s choice of flexibility in the initial mix offinancing raised, the use of flexibility to understand differences in security design and thefirm’s security-issuance decision, the impact of flexibility on the use of collateral inlending, the role of flexibility in capital budgeting decisions, the effect of flexibilityconsiderations in the design of contracts in a principal-agent setting, the interpretation of“power” and conformity in organizations in the context of flexibility, and the choice betweenprivate an public ownership in the context of flexibility.

Suggested Citation

  • Arnoud W.A. Boot & Anjan V. Thakor, 2003. "The Economic Value of Flexibility when there is Disagreement," Tinbergen Institute Discussion Papers 03-002/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030002
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    1. Arnoud W.A. Boot & Anjan V. Thakor, 2003. "Disagreement and Flexibility: A Theory of Optimal Security Issuance and Capital Structure," Tinbergen Institute Discussion Papers 03-001/2, Tinbergen Institute.
    2. Blau, Benjamin M. & Fuller, Kathleen P., 2008. "Flexibility and dividends," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 133-152, April.
    3. Massimo Omiccioli, 2005. "Trade Credit as Collateral," Temi di discussione (Economic working papers) 553, Bank of Italy, Economic Research and International Relations Area.
    4. Mark Pyles & Donald Mullineax, 2008. "Constraints on Loan Sales and the Price of Liquidity," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(1), pages 21-36, February.

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    More about this item

    Keywords

    Managerial Decision Making; Corporate Finance.;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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