Real Investment Decisions Under Adjustment Costs and Asymmetric Information
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.Download Info
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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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Related research
Keywords: Investment; information asymmetry; adjustment cost; mergers and acquisition;Other versions of this item:
- Gaudet, Gerard & Lasserre, Pierre & Van Long, Ngo, 1998. "Real investment decisions under adjustment costs and asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 71-95, September.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-09-01 (All new papers)
- NEP-FIN-1999-09-01 (Finance)
- NEP-MIC-1999-09-01 (Microeconomics)
- NEP-PKE-1999-09-01 (Post Keynesian Economics)
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Holmstrom, Bengt & Tirole, Jean, 1997.
"Financial Intermediation, Loanable Funds, and the Real Sector,"
The Quarterly Journal of Economics,
MIT Press, vol. 112(3), pages 663-91, August.
- Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
- 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.
- 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.
Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Claessens, Stijn & Ueda, Kenichi & Yafeh, Yishay, 2010.
"Financial Frictions, Investment, and Institutions,"
CEPR Discussion Papers
8170, C.E.P.R. Discussion Papers.
- Stijn Claessens & Kenichi Ueda & Yishay Yafeh, 2010. "Financial Frictions, Investment, and Institutions," IMF Working Papers 10/231, International Monetary Fund.
- 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.
- 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.
- Ngo Long, 2011. "Dynamic Games in the Economics of Natural Resources: A Survey," International Review of Economics, Springer, vol. 1(1), pages 115-148, March.
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