The Dynamics of Investment and Financing underAsymmetric Information

This paper develops a tractable real options framework to analyze the eects of asym-metric information on investment and nancing decisions when rms require externalfunds to nance investment. Our analysis shows that corporate insiders can signal theirprivate information to outside investors using the timing of investment and/or the rm'sdebt-equity mix. Several important contributions follow from this result. First, we showthat rms' equilibrium investment strategies dier signicantly from those implied bystandard real options models with perfect information.[...]

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Year of publication:	2008-12-01
Authors:	Morellec, Erwan ; Schürhoff, Norman
Institutions:	Swiss National Centre of Competence in Research North South <Bern>
Subject:	Asymmetrische Information \| asmmetric informatin \| Investitionsentscheidung \| Entscheidung bei Risiko \| decision \| Timing

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I. Introduction
II. Model and assumptions
A. Setup
B. Investment timing under symmetric information
C. Investment timing and signaling
III. Signaling through investment timing
A. Investment timing in the separating equilibrium
B. Implications of the separating equilibrium
C. Pooling in equity: The underpricing-overinvestment trade-off
D. Investment timing under product market competition
IV. Signalling through debt nancing
A. Debt Issuance and Firm Valuation
B. Separation through debt issuance
C. Implications of the separating equilibium with debt
V. Conclusion
Appendix
References

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