Real Options Signaling Games with Applications to Corporate Finance

“…Although the real options framework has been extended to incorporate agency frictions, see p.e. Grenadier and Wang (2005), Grenadier and Malenko (2010) and Morellec and Schürhoff (2010), only the choice of a single project is studied. This is due to the fact that characterizing the choice of multiple projects needs to take into account how taking one project changes the decision maker's value function with regard to the other projects, which is difficult to determine in the real options setup.…”

Section: Related Literaturementioning

confidence: 99%

Incentives, Project Choice and Dynamic Multitasking

Szydlowski

2011

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract I study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project execution which depends on both a project's NPV as well as it's signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, current firm size and the agent's continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice will depend more on the NPV and less on the signal to noise ratio. Terms of use: Documents inThe optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection rule resembles a hurdle rate criterion.

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“…In [15], the presence of asymmetric information and the signaling effect erode the option value of the firm. [5] investigated a similar model that considers the conflicts between continuum types of an informed agent and an outsider. Information revelation involving several firms is investigated by [4], where each firm has private information about the payoff uncertainty and updates the belief for the payoff by observing the strategies exercised by other firms.…”

Section: Introductionmentioning

confidence: 99%

Real Options and Signaling in Strategic Investment Games

Watanabe

2018

JORSJ

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A game with an incumbent and an entrant is considered. Each of them decides a timing of an investment into a new project. The profit flows of both firms involve two uncertain factors: (i) demand for the market observed only by the incumbent, and (2) fluctuation of the profit flow described by a geometric Brownian motion observed by both firms. The optimal timing of the investment of the incumbent under high demand is earlier than that under low demand, if the entrant's timing is fixed. However, the earlier investment of the incumbent may reveal information of high demand to the entrant, so that the early investment of the incumbent would accelerate the timing of the investment of the entrant. This earlier investment of the entrant reduces monopolistic profit of the incumbent before the investment of the entrant. Therefore, the incumbent under high demand may delay the timing of the investment strategically in order to hide the information. In the present paper, equilibria of this signaling game are characterized and sufficient conditions for the strategic behavior of the incumbent are obtained.The values of both firms in equilibria are compared with the case of complete information and the welfare loss is investigated. I observe that the marginal profit in the duopoly for the high-demand incumbent is small the incumbent invests strategically, whereas the incumbent invests truthfully if marginal profit in the duopoly is sufficiently large. Strategic behavior of the incumbent is also observed when the investment cost or volatility of the incumbent is large or the investment cost of the entrant is small.

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Real Options Signaling Games with Applications to Corporate Finance

Cited by 115 publications

References 52 publications

Investment Busts, Reputation, and the Temptation to Blend in with the Crowd

Investment Busts, Reputation, and the Temptation to Blend in with the Crowd

Incentives, Project Choice and Dynamic Multitasking

Real Options and Signaling in Strategic Investment Games

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