Corporate investment decisions under asymmetric information and uncertainty
Peter Bell ()
MPRA Paper from University Library of Munich, Germany
This paper develops a model to study corporate investment decisions using the principal-agent framework. The model has asymmetric information where the agent knows the true value of the company and the principal does not. The model also has uncertainty where the company is presented an investment opportunity with a certain cost and random benefit. The agent must decide whether they will sell stock to the principal and make the investment. Results show that the information asymmetry imposes a cost on the principal because the agent will forgo some profitable projects or undertake some with expected losses. A procedure for the principal to distinguish undervalued and overvalued companies is presented.
Keywords: Decision making; Investment project; private information; uncertainty (search for similar items in EconPapers)
JEL-codes: D82 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-ppm
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Working Paper: Corporate investment decisions under asymmetric information and uncertainty (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:38348
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