Investment strategies, reversibility, and asymmetric information

Xue Cui and Takashi Shibata ()

European Journal of Operational Research, 2017, vol. 263, issue 3, 1109-1122

Abstract: In this paper, we examine the reversibility effects on a firm’s investment trigger (timing) and quantity strategies in the presence of asymmetric information between the firm owner and the manager. We obtain five main results under conditions of asymmetric information. First, information asymmetry increases (delays) investment trigger (timing). Second, under information asymmetry, investment quantity increases in degree of reversibility, while under information symmetry it is constant. Third, social loss arising from information asymmetry increases in degree of manager’s informational rent and degree of reversibility, but decreases in volatility. Fourth, an increase in volatility increases the owner’s value, while it decreases the manager’s value. Fifth, an increase in volatility increases the ex post manager’s value, while it decreases the ex ante manager’s value. An increase in degree of reversibility decreases the ex post manager’s value, while it increases the ex ante manager’s value.

Keywords: Investment analysis; Real options; Investment quantity; Private information (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:263:y:2017:i:3:p:1109-1122

DOI: 10.1016/j.ejor.2017.06.032

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