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Real Investment Decisions Under Adjustment Costs and Asymmetric Information

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Author Info

  • Gérard Gaudet

    ()
    (Economics Department, Université de Montréal)

  • Pierre Lasserre

    ()
    (Economics Department, UQAM)

  • Ngo Van Long

    ()
    (Economics Department, McGill University)

Abstract

We study the cost-of-adjustment model of investment when there is asymmetry of information between owners (the principal) and managers (the agent). Information asymmetry distorts the relationship between investment and the cost of capital for all agent types, and 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 gives a new interpretation of Tobin's q under asymmetric information, explaining some results of the mergers and acquisition literature.

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Bibliographic Info

Paper provided by Université du Québec à Montréal, Département des sciences économiques in its series Cahiers de recherche du Département des sciences économiques, UQAM with number 9908.

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Length: 38
Date of creation: Aug 1999
Date of revision:
Publication status: published in Journal of Economic Dynamics and Control; 23(1), October 1998, pages 71-95.
Handle: RePEc:cre:uqamwp:9909

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Keywords: Investment; information asymmetry; adjustment cost; mergers and acquisition;

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References

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  1. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
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  6. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago.
  8. Andrew B. Abel & Olivier J. Blanchard, 1983. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
  9. Lewis, Tracy R & Sappington, David E M, 1989. "Inflexible Rules in Incentive Problems," American Economic Review, American Economic Association, vol. 79(1), pages 69-84, March.
  10. 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.
  11. 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.
  12. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
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  14. 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.
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  18. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
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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.
  2. Lee, Tan, 2004. "Determinants of the foreign equity share of international joint ventures," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2261-2275, October.
  3. Jyh-Bang Jou, 2001. "Environment, Asset Characteristics, and Optimal Effluent Fees," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(1), pages 27-39, September.
  4. Shibata, Takashi & Nishihara, Michi, 2010. "Dynamic investment and capital structure under manager-shareholder conflict," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 158-178, February.
  5. Yishay Yafeh & Kenichi Ueda & Stijn Claessens, 2010. "Financial Frictions, Investment, and Institutions," IMF Working Papers 10/231, International Monetary Fund.
  6. Yishay Yafeh & Kenichi Ueda & Stijn Claessens, 2010. "Investment and Institutions," 2010 Meeting Papers 513, Society for Economic Dynamics.
  7. Ngo Long, 2011. "Dynamic Games in the Economics of Natural Resources: A Survey," Dynamic Games and Applications, Springer, vol. 1(1), pages 115-148, March.
  8. Shibata, Takashi, 2009. "Investment timing, asymmetric information, and audit structure: A real options framework," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 903-921, April.
  9. Jou, Jyh-Bang, 2004. "Environment, irreversibility and optimal effluent standards," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(1), March.

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