مقاله سال ۲۰۱۷

In this paper, we investigate how changes in the reversibility of investment affect a firm’s investment timing and quantity strategies when information asymmetry exists. This paper is based on many previous studies regarding the investment decision problem. The seminal work by McDonald and Siegel (1986) provides a standard framework for examining the timing of an investment where the investment cost is fully irreversible. Abel and Eberly (1999) incorporate reversibility of investment and examine the optimal investment of a firm. The reversibility of investment means that, when the profitability of capital becomes unfavorable, a firm can sell capital at a lower price than the initial investment cost. Thus, under the assumption of reversibility, the firm owns an abandonment option. Following Abel and Eberly (1999), Wong (2010) examines the effects of reversibility on investment timing and quantity (intensity) strategies. Wong (2010) shows that higher reversibility accelerates investment but has no impact on quantity. The frameworks of Abel and Eberly (1999) and Wong (2010) are made under the full (symmetric) information assumption.

However, in most modern corporations, many investment decisions are made under conditions of asymmetric information. For example, firm owners would like to delegate management to managers, taking advantage of managers’ professional skills. In this situation, the presence of asymmetric information is inevitable. Managers may own private information that owners cannot observe. Grenadier and Wang (2005) examine investment timing in the presence of a manager’s private information and show that the investment timing under asymmetric information is more delayed than under full information.1 Cui and Shibata (2017) extend the work of Grenadier and Wang (2005) by incorporating a quantity decision and show that the investment quantity under asymmetric information is higher than under full information.2 To the best of our knowledge, most studies on the asymmetric information model assume that the investment cost is fully irreversible (i.e., there is no consideration of the reversibility of investment).

(۲۰۱۶) extend Wong (2010) by incorporating asymmetric information, and alternatively extend Cui and Shibata (2017) to account for the reversibility of investment. Cui and Shibata (2016) find numerically that, under asymmetric information, higher reversibility accelerates the investment and increases the quantity. The former result about investment timing is the same as under full information (i.e., Wong (2010)). By contrast, interestingly, the latter result about quantity is contrary to that under full information (i.e., the quantity under asymmetric information is no longer independent of the degree of reversibility of investment). However, Cui and Shibata (2016) provide no economic interpretation for the mechanism of the interesting result. They also provide no examination of the firm’s and manager’s values under asymmetric information. Thus, we undertake this study to extend Cui and Shibata (2016) in at least three ways.