Real Investment Decisions Under Adjustment Costs and Asymmetric Information
AbstractWe 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 InfoPaper 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.
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.
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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; Mechanism Design
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)
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