Investment Timing, Agency, and Information

50 Pages Posted: 16 Mar 2005 Last revised: 8 Aug 2009

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: February 2005

Abstract

This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private 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 implied investment behavior differs significantly from that of the first-best no-agency solution. In particular, greater inertia occurs in investment, as the model predicts that the manager will have a more valuable option to wait than the owner.

Suggested Citation

Grenadier, Steven R. and Wang, Neng, Investment Timing, Agency, and Information (February 2005). NBER Working Paper No. w11148, Available at SSRN: https://ssrn.com/abstract=669447

Steven R. Grenadier (Contact Author)

Stanford Graduate School of Business ( email )

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Neng Wang

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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