Investment Timing and Incentive Costs

Sebastian Gryglewicz, Barney Hartman-Glaser*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

4 Citations (Scopus)

Abstract

We analyze how the costs of smoothly adjusting capital, such as incentive costs, affect investment timing. In our model, the owner of a firm holds a real option to increase a lumpy form of capital and can also smoothly adjust an incremental form of capital. Increasing the cost of incremental capital can delay or accelerate investment in lumpy capital. Incentive costs due to moral hazard are a natural source of costs for the accumulation of incremental capital. When moral hazard is severe, delaying investment in lumpy capital is costly, and overinvesting relative to the first-best case is optimal. Received January 24, 2017; editorial decision March 15, 2019 by Editor Itay Goldstein.

Original languageEnglish
Pages (from-to)309-357
Number of pages49
JournalReview of Financial Studies
Volume33
Issue number1
DOIs
Publication statusPublished - 2020

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