REAL INVESTMENT DECISIONS UNDER ADJUSTMENT COSTS AND ASYMMETRIC INFORMATION

We study the cost-of-adjustment model of investment when there is asym metry of information between owners (the principal) and managers (the agent). Information asymmetry distorts the relationship between invest ment and the cost of capital for all agent types, and a regime of inac tion appears over a certain cost range, in an observationally differen t way than when fixed adjustment costs, or irreversibilities, cause a similar phenomenon. Uncertainty, in the form of an increase in the spr ead of agents' types, tends to reduce investment despite symmetric adj ustment cost and perfect competition. The model gives a new interpreta tion of Tobin's q under asymmetric information, explaining some result s of the mergers and acquisition literature. (C) 1998 Elsevier Science B.V. All rights reserved.