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Investment Timing, Agency, and Information

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Author Info
Steven R. Grenadier
Neng Wang

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Abstract

This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The implied investment behavior differs significantly from that of the first-best no-agency solution. In particular, greater inertia occurs in investment, as the model predicts that the manager will have a more valuable option to wait than the owner.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11148.

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Date of creation: Feb 2005
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Handle: RePEc:nbr:nberwo:11148

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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References listed on IDEAS
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    Other versions:
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Full references

Cited by:
(explanations, Please 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.)

  1. Gryglewicz, Sebastian & Huisman, K.J.M. & Kort, Peter M., 2006. "Finite project life and uncertainty effects on investment," Discussion Paper 124, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  2. Michi Nishihara, 2009. "Preemptive Investment Game with Alternative Projects," Discussion Papers in Economics and Business 09-16, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
  3. Junjian Miao & Neng Wang, 2005. "Investment, Consumption and Hedging under Incomplete Markets," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-011, Boston University - Department of Economics, revised Sep 2006. [Downloadable!]
    Other versions:
  4. A. Mantovi, 2009. "Long run value stabilization in a real options perspective," Economics Department Working Papers 2009-EP01, Department of Economics, Parma University (Italy). [Downloadable!]
  5. Hazer Inaltekin & Robert Jarrow & Mehmet Saglam & Yildiray Yildirim, 2009. "Housing Market Microstructure," Quantitative Finance Papers 0907.1853, arXiv.org. [Downloadable!]
  6. Jean-Paul Décamps & Stéphane Villeneuve, 2007. "Optimal dividend policy and growth option," Finance and Stochastics, Springer, vol. 11(1), pages 3-27, January. [Downloadable!] (restricted)
  7. Jianjun Miao & Neng Wang, 2004. "Investment, Hedging, and Consumption Smoothing," Finance 0407014, EconWPA. [Downloadable!]
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