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Real investment decisions under adjustment costs and asymmetric information

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  • Gaudet, Gerard
  • Lasserre, Pierre
  • Van Long, Ngo

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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  • 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.
    • Handle: RePEc:eee:dyncon:v:23:y:1998:i:1:p:71-95
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    Cited by:

    1. Shibata, Takashi, 2009. "Investment timing, asymmetric information, and audit structure: A real options framework," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 903-921, April.
    2. Shibata, Takashi & Nishihara, Michi, 2010. "Dynamic investment and capital structure under manager-shareholder conflict," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 158-178, February.
    3. Wang Lina & Milis Koen & Poelmans Stephen, 2021. "Study on Pollution Cost Control Model under Asymmetric Information Based on Principal Agent," Journal of Systems Science and Information, De Gruyter, vol. 9(5), pages 549-557, October.
    4. Hamid Beladi & May Hu & Tan (Charlene) Lee, 2022. "International joint ventures, technology licensing and ownership structure," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 423-439, December.
    5. Lee, Tan, 2004. "Determinants of the foreign equity share of international joint ventures," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2261-2275, October.
    6. Ngo Long & Gerhard Sorger, 2010. "A dynamic principal-agent problem as a feedback Stackelberg differential game," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 491-509, December.
    7. Claessens, Stijn & Ueda, Kenichi & Yafeh, Yishay, 2014. "Institutions and financial frictions: Estimating with structural restrictions on firm value and investment," Journal of Development Economics, Elsevier, vol. 110(C), pages 107-122.
    8. Wang Lina & Poelmans Stephen & Milis Koen, 2020. "SCM Implementation Decisions Under Asymmetric Information: An Agency Approach," Journal of Systems Science and Information, De Gruyter, vol. 8(5), pages 447-457, October.
    9. Yishay Yafeh & Kenichi Ueda & Stijn Claessens, 2010. "Investment and Institutions," 2010 Meeting Papers 513, Society for Economic Dynamics.
    10. Jyh-Bang Jou, 2001. "Environment, Asset Characteristics, and Optimal Effluent Fees," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 20(1), pages 27-39, September.
    11. Benchekroun, Hassan & van Long, Ngo, 1998. "Efficiency inducing taxation for polluting oligopolists," Journal of Public Economics, Elsevier, vol. 70(2), pages 325-342, November.
    12. Claessens, Stijn & Yafeh, Yishay & Ueda, Kenichi, 2010. "Financial Frictions, Investment, and Institutions," CEPR Discussion Papers 8170, C.E.P.R. Discussion Papers.
    13. 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.
    14. Jou, Jyh-Bang, 2004. "Environment, irreversibility and optimal effluent standards," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(1), pages 1-32.
    15. Jyh‐Bang Jou, 2004. "Environment, irreversibility and optimal effluent standards," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(1), pages 127-158, March.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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