Corporate investment decisions under asymmetric information and uncertainty
AbstractThis paper develops a model to study corporate investment decisions using the principal-agent framework. The model has asymmetric information where the agent knows the true value of the company and the principal does not. The model also has uncertainty where the company is presented an investment opportunity with a certain cost and random benefit. The agent must decide whether they will sell stock to the principal and make the investment. Results show that the information asymmetry imposes a cost on the principal because the agent will forgo some profitable projects or undertake some with expected losses. A procedure for the principal to distinguish undervalued and overvalued companies is presented.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 38690.
Date of creation: 16 Apr 2012
Date of revision:
Corporate decision making; issuance of stock; value of investment;
Other versions of this item:
- Bell, Peter N, 2012. "Corporate investment decisions under asymmetric information and uncertainty," MPRA Paper 38348, University Library of Munich, Germany.
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-CTA-2012-05-15 (Contract Theory & Applications)
- NEP-PPM-2012-05-15 (Project, Program & Portfolio Management)
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