Interactions between investment timing and management effort under asymmetric information: Costs and benefits of privatized firms

In this paper, we examine the interactions between investment timing and management effort in the presence of asymmetric information between the owner and the manager where the manager has an informational advantage. We find that investment timing is later under asymmetric information than under full information, implying a decrease in the value of equity option. However, in order to minimize any distortion under underinvestment, management effort is greater under asymmetric information than under full information. We show that there are trade-offs in the efficiencies of investment timing and management effort under asymmetric information. These results fit well with the findings of past empirical studies concerning the costs and benefits of privatized firms.