Bell, Peter (2012): Corporate investment decisions under asymmetric information and uncertainty.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Corporate investment decisions under asymmetric information and uncertainty|
|Keywords:||Corporate decision making; issuance of stock; value of investment|
|Subjects:||C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General
G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
|Depositing User:||Peter N Bell|
|Date Deposited:||08. May 2012 22:12|
|Last Modified:||26. Feb 2013 00:24|
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