Real Investment Decisions Under Adjustment Costs and Asymmetric Information

Gérard Gaudet, Pierre Lasserre and Ngo Long

No 9908, Cahiers de recherche du Département des sciences économiques, UQAM from Université du Québec à Montréal, Département des sciences économiques

Abstract: We study the cost-of-adjustment model of investment when there is asymmetry of information between owners (the principal) and managers (the agent). Information asymmetry distorts the relationship between investment and the cost of capital for all agent types, and a regime of inaction appears over a certain cost range, in an observationnally different way than when fixed adjustment costs, or irreversibilities, cause a similar phenomenon. Uncertainty, in the form of an increase in the spread of agents' types, tends to reduce investment despite symmetric adjustment cost and perfect competition. The model gives a new interpretation of Tobin's q under asymmetric information, explaining some results of the mergers and acquisition literature.

Keywords: Investment; information asymmetry; adjustment cost; mergers and acquisition (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Pages: 38
Date: 1999-08
New Economics Papers: this item is included in nep-fin, nep-mic and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Economic Dynamics and Control; 23(1), October 1998, pages 71-95.

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