Investment Timing, Agency, and Information

Posted: 7 May 2005

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)

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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.

Keywords: Real options, investment timing, contracting, agency

JEL Classification: G31, D82

Suggested Citation

Grenadier, Steven R. and Wang, Neng, Investment Timing, Agency, and Information. Available at SSRN: https://ssrn.com/abstract=715023

Steven R. Grenadier

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 (Contact Author)

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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