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The effects of costly exploration on optimal investment timing

  • Nishihara, Michi
  • Shibata, Takashi

This paper investigates a principal-agent model in which an owner (principal) optimizes a contract with a manager (agent) who has been delegated to undertake an investment project. In the model, we explore the effects of costly exploration by which the manager learns the real value of development cost. We show that high exploration cost can lead to a pooling policy not contingent on project type. Further, and more notably, we show that, in the presence of asymmetric information, higher exploration cost leads to wealth transfer from owner to manager and can ultimately improve social welfare.

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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 20 (2011)
Issue (Month): 3 (August)
Pages: 105-112

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Handle: RePEc:eee:revfin:v:20:y:2011:i:3:p:105-112
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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  18. Michi Nishihara & Takashi Shibata, 2010. "Interactions between Preemptive Competition and a Financing Constraint," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 1013-1042, December.
  19. Hackbarth, Dirk, 2009. "Determinants of corporate borrowing: A behavioral perspective," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 389-411, September.
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