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Corporate investment decisions under asymmetric information and uncertainty


  • Bell, Peter


This 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.

Suggested Citation

  • Bell, Peter, 2012. "Corporate investment decisions under asymmetric information and uncertainty," MPRA Paper 38690, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:38690

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    References listed on IDEAS

    1. Laurent Calvet & Adlai Fisher, 2002. "Multifractality In Asset Returns: Theory And Evidence," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 381-406, August.
    2. T. Di Matteo, 2007. "Multi-scaling in finance," Quantitative Finance, Taylor & Francis Journals, vol. 7(1), pages 21-36.
    3. Jiang, Zhi-Qiang & Zhou, Wei-Xing, 2008. "Multifractality in stock indexes: Fact or Fiction?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(14), pages 3605-3614.
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    More about this item


    Corporate decision making; issuance of stock; value of investment;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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