News About News: Information Arrival and Irreversible Investment

Allan Drazen and Plutarchos Sakellaris

Macroeconomic Dynamics, 1999, vol. 3, issue 3, 451-462

Abstract: We analyze how uncertainty about when information about future returns to a project may be revealed affects investment. Whereas good news about future returns boosts investment, good news about news (that is, news that information may arrive sooner) is shown to depress investment. We show that early revelation increases the value of an irreversible investment project to a risk-neutral investor. Our framework allows us to study irreversible investment projects whose value has a time-variable volatility. We also consider how heterogeneity of revelation information across firms may induce a better-informed firm to share its information with competitors.

Date: 1999
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