Option to Abandon, Syndication and Investment Return

Abstract

In contrast to the standard results, we show that investment reversibility and increased volatility of the option to abandon do not increase investment returns for a lumpy project with multiple investors. Increasing an investor's commitment augments the likelihood of project success and exerts a positive externality on other investors' welfare. These effects also imply that the optimal number of investors is either large or small. Using private equity data, we support the model and find a convex relationship between investment performance and syndicate size. Our results have important implications in the debate on the public to private asset allocation shift.