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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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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
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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. 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.
  2. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  3. 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.
  4. 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.
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Cited by:
  1. Claessens, Stijn & Ueda, Kenichi & Yafeh, Yishay, 2010. "Financial Frictions, Investment, and Institutions," CEPR Discussion Papers 8170, C.E.P.R. Discussion Papers.
  2. 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.
  3. 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.

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