Sequential Investment, Hold-up, and Ownership Structure

• Main Authors: ZHANG, Juyuan, ZHANG, Yi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Sequential Investment; Hold-up; Underinvestment; Optimal Ownership Structure; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1480; https://ink.library.smu.edu.sg/context/soe_research/article/2479/viewcontent/SequentialHoldup_theory.pdf
• Institution: Singapore Management University

We construct a sequential investment model to investigate individual firms’ strategic choices of organizational forms when outsourcing their intermediate products. Our results indicate that as a result of the encouragement effect of sequential complementary investments, sequential investment alleviates the underinvestment caused by the hold-up problem. Thereafter, we analyze the impact of sequential investment on the choice of ownership structure. We show that contrary to the result of the standard property rights theory, strictly complementary assets could be owned separately.