The Commitment of Finance, Duplicated Monitoring and the Investment Horizon

Ernst-Ludwig von Thadden

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: The paper presents a simple model of financial contracting for a long-term investment project in which early project termination may be an optimal response to information asymmetries. The paper characterizes when this constellation leads to inefficient short- term investment. It is shown that in this setting delegated monitoring is problematic because it creates a commitment problem for the investor. This yields a countervailing effect to the scale economies inherent in the delegation of monitoring. It is shown that contracting with more than one investor can provide an informational insurance to the firm which lengthens its planning horizon.

Keywords: Corporate Finance; Long-Term Investment; Monitoring; Exclusivity (search for similar items in EconPapers)
Date: 1992-12
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Citations: View citations in EconPapers (53)

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