More Haste, Less Speed? Signaling through Investment Timing

We consider a real option model in which a cash-constrained entrepreneur learns prior to investing, but at a speed which is private information. The entrepreneur seeks outside funding, and uses the timing of his investment to signal his confidence in the venture, and accordingly obtain cheaper credit. In the benchmark case with no informational friction, we show that the optimal investment date may be nonmonotonic or decreasing in the learning speed, depending on the prior NPV of the project: better learning increases the value of the option to wait, but also increases the speed of updating. In the presence of asymmetric information, the cash constraint may result in distortions in investment timing, and the inefficiency is higher the more stringent the cash shortage. Inefficient investment policy may take both the form of hurried investment (as compared to the benchmark), when both entrepreneur types learn suficiently fast, and of delayed investment, when the slow-learning type does not learn fast enough. Therefore, the severity of the cash constraint affects the magnitude of the timing distortion, but not its direction.