Real Option Financing Under Asymmetric Information

Review of Financial Studies, Forthcoming

33 Pages Posted: 8 Oct 2009 Last revised: 30 Nov 2012

See all articles by Matthieu Bouvard

Matthieu Bouvard

McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 12, 2010

Abstract

I study the impact of capital market imperfections on the exercise of a real option. An entrepreneur has private information about a venture for which she seeks outside funding. An initial investment gives access to a continuous flow of information about the project. The duration of that experimentation phase is used to signal quality and investment may be delayed relative to the first best. Investors use milestone contracts, and the entrepreneur is granted stock options with a vesting period or receives a compensation in case of failure. The pay-performance sensitivity of her compensation is correlated with risk taking. The initial mix of inside and outside financing affects the timing of future investment, in line with empirical evidence.

Keywords: Real Options, Innovation, Contracts

JEL Classification: G32, D82, D83

Suggested Citation

Bouvard, Matthieu, Real Option Financing Under Asymmetric Information (March 12, 2010). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1483688 or http://dx.doi.org/10.2139/ssrn.1483688

Matthieu Bouvard (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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