Signalling with Costly Cash: Is it an Efficient Mechanism?

17 Pages Posted: 17 Sep 2012

See all articles by Patrick Navatte

Patrick Navatte

Université de Rennes I

Rivo A Randrianarivony

University of Rennes 1; CREM (UMR CNRS 6211)

Jean‐Laurent Viviani

Université de Rennes 1

Date Written: June 7, 2012

Abstract

This paper has for aim to revisit or to give some insights to the Morellec and Schürhoff (2011) dynamic real option investment model in a world in which firms are compelled to raise outside funds from uninformed investors to finance a total investment outlay. These authors determined a unique moment for financing and investing at the same time. We show that it could be valuable to disconnect the financing decision period, from the period chosen for exercising the real option of investment, and that using cash to separate is possible when it is costly enough. Nevertheless signalling by investment distortion is a better and more efficient solution. We achieve this conclusion giving proofs, and illustrating it by comparing several separating equilibriums with the help of some simulations.

Keywords: Asymmetric information, Financing decisions, Cash holdings, Corporate investment, Real options

Suggested Citation

Navatte, Patrick and Randrianarivony, Rivo A and Viviani, Jean-Laurent, Signalling with Costly Cash: Is it an Efficient Mechanism? (June 7, 2012). 29th International Conference of the French Finance Association (AFFI) 2012, Available at SSRN: https://ssrn.com/abstract=2079459 or http://dx.doi.org/10.2139/ssrn.2079459

Patrick Navatte (Contact Author)

Université de Rennes I ( email )

7, Place Hoche
Institut de Gestion de Rennes
35065 Rennes Cedex
France
+33 2 9925 3545 (Phone)
+33 2 9938 8084 (Fax)

Rivo A Randrianarivony

University of Rennes 1 ( email )

11 Rue Jean Macé
Rennes, Rennes 35708
France

CREM (UMR CNRS 6211) ( email )

7, Place Hoche
Rennes, Bretagne 35065
France

Jean-Laurent Viviani

Université de Rennes 1 ( email )

11 Rue Jean Macé
Rennes, Rennes 35700
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
638
PlumX Metrics