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Corporate investment decisions under asymmetric information and uncertainty

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  • Bell, Peter

Abstract

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.

Suggested Citation

  • Bell, Peter, 2012. "Corporate investment decisions under asymmetric information and uncertainty," MPRA Paper 38690, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:38690
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    References listed on IDEAS

    as
    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Linda Schmid Klein & Thomas J. O’Brien & Stephen R. Peters, 2002. "Debt vs. Equity and Asymmetric Information: A Review," The Financial Review, Eastern Finance Association, vol. 37(3), pages 317-349, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Corporate decision making; issuance of stock; value of investment;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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