Investment Timing, Agency, and Information / Steven R. Grenadier, Neng Wang.

Format:

Book

Author/Creator:

Grenadier, Steven R.

Contributor:

National Bureau of Economic Research.

Wang, Neng.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11148.

NBER working paper series no. w11148

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

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.

Notes:

Print version record

February 2005.