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Real Investment Decisions Under Information Constraints

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  • Gérard Gaudet
  • Pierre Lasserre

    ()

  • Ngo Van Long

    ()

Abstract

We investigate investment behavior when there is asymmetry of information between owners (the principal) and managers (the agent). The model accepts the standard cost-of-adjustment model as a particular case and is directly compared with it. For all types, information asymmetry distorts the relationship between investment and the cost of capital, and the relationship between investment and the shadow value of capital. In particular, a regime of inaction appears over a certain cost range, in an observationnally different way than when fixed adjustment costs, or irreversibilities, cause a similar phenomenon. Uncertainty, in the form of an increase in the spread of agents' types, tends to reduce investment despite symmetric adjustment cost and perfect competition. The model clarifies the interpretation of Tobin's q under asymmetric information and explains some results of the mergers and acquisition literature. En présence d'asymétrie d'information entre propriétaires (le principal) et administrateurs (l'agent), la relation investissement coût du capital et la relation investissement valeur implicite du capital subissent une distorsion pour tous les types. Dans un modèle avec coût d'ajustement par ailleurs standard, il apparaît notamment un régime d'inaction pour une certaine gamme de coûts. Ce phénomène se présente sous une forme différente de ce qu'implique la présence de coûts fixes ou d'irréversibilités,0501s ressemble à ce qui survient lorsque le coût du capital est différent pour une hausse que pour une baisse du stock. L'incertitude, qui prend la forme d'un élargissement de la distribution des types, tend cependant à réduire l'investissement. Le modèle clarifie l'interprétation du q de Tobin sous asymétrie d'information et explique certains résultats de la littérature sur les fusions et acquisitions.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-33.

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Date of creation: 01 Jul 1995
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Handle: RePEc:cir:cirwor:95s-33

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Keywords: Incentive contracts; Dynamic/Asymmetric information; Principal agent relationship; Investment; Cost of adjustment; Uncertainty; Contrats incitatifs ; dynamique ; information asymétrique ; relation principal-agent ; investissement ; incertitude.;

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References

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  1. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  3. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Demers, Fanny S. & Demers, Michel & Schaller, Huntley, 1994. "Irreversible investment and costs of adjustment," CEPREMAP Working Papers (Couverture Orange) 9416, CEPREMAP.
  5. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  6. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  8. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  9. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
  10. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  11. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  12. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
  13. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
  14. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  15. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  16. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
  17. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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Cited by:
  1. Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO.

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