Investment Timing with Incentive-Disincentive Contracts under Asymmetric Information

Takashi Shibata, Michi Nishihara
2012 Technology and Investment  
This paper examines a manager's investment timing in the presence of asymmetric information between an owner and the manager. In particular, we extend the asymmetric information problem by incorporating not only an incentive but also disincentive. Investment timing is delayed more under asymmetric information than under symmetric information. However, investment timing under asymmetric information converges to the symmetric information investment timing by making the disincentive (penalty) for
more » ... tive (penalty) for the manager's untruthful report sufficiently large. Consequently, by adopting an enlarged set of incentive-disincentive contracts framework, we showed that there is a relationship between the symmetric and asymmetric information problems. standard real options model has been extended in various ways. For example, Weeds [3] and Nishihara and Fukushima [4] consider investment timing by taking into account strategic interactions. Bernardo and Chowdhry [5] and Shibata [6] analyse investment decisions under incomplete information. 2 While these papers focus on the agency conflicts between owners and managers, a similar problem exists between stockholders and bondholders. Mello and Parsons [7] and Leland [8] examine the agency problem between stockholders and bondholders using the real options approach. Copyright © 2012 SciRes. TI T. SHIBATA, M. NISHIHARA 75 t 1 1 . If the manager adopts the investment at 1 t X * 0;   * x *    , then this action signals I = I 1 to the market. Thus, the stock price jumps upwards to 73.13. Otherwise, the stock price jumps downwards to 53.70. The jump size is 9.71 under P = 40. The upper right-hand side panel illustrates the jump size of the stock price reaction to investment for various values of P. The jump size has a Λ-shaped relation with P. The lower left-hand side panel depicts the effects of jump size with respect to the volatility. The lower right-hand side panel demonstrate the jump size of the efficiency measure for the auditing cost function.
doi:10.4236/ti.2012.32011 fatcat:nbw4mjtjmzgkvli6fq3m4wkb6i