Investment Timing, Agency and Information

49 Pages Posted: 4 Sep 2003

See all articles by Steven R. Grenadier

Steven R. Grenadier

Stanford Graduate School of Business

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2003

Abstract

This paper provides a model of optimal investment timing in a decentralized firm under conditions of agency and asymmetric information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The terms of the manager's option are determined by an optimal contracting model, and provide an incentive for the manager to both extend effort and truthfully reveal his private information. The implied investment behavior differs significantly from that of standard real options models. In particular, there will be greater inertia in investment, in that the model leads to the manager having an even greater "option to wait" than the owner. The interplay between the twin forces of hidden information and hidden action leads to markedly different investment outcomes than when only one of the two forces is at work.

Keywords: real options, capital budgeting, agency cost, hidden information, hidden action, investment timing

JEL Classification: G31

Suggested Citation

Grenadier, Steven R. and Wang, Neng, Investment Timing, Agency and Information (September 2003). Available at SSRN: https://ssrn.com/abstract=440944 or http://dx.doi.org/10.2139/ssrn.440944

Steven R. Grenadier (Contact Author)

Stanford Graduate School of Business ( email )

Graduate School of Business
Stanford, CA 94305-5015
United States
650-725-0706 (Phone)
650-725-6152 (Fax)

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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