Option values and endogenous uncertainty in ESOPs, MBOs and asset-backed loans

We consider contracts to purchase assets by means of streams of payments over time, with the asset as security. These give the purchaser an option not present if all payment is made up front, the option of stopping payments and delivering the asset in satisfaction of the remaining debt. We argue that the value inherent in such options explains the attractions of asset-backed loans, employee stock option plans and MBOs.