Investment Timing and Incentive Costs∗

Sebastian Gryglewicz; Barney Hartman-Glaser

doi:10.1093/rfs/hhz051

Investment Timing and Incentive Costs^∗

Sebastian Gryglewicz
, Barney Hartman-Glaser^*

^*Corresponding author for this work

The John E. Anderson Graduate School of Management

Research output: Contribution to journal › Article › Academic › peer-review

14 Citations (Scopus)

35 Downloads (Pure)

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 language	English
Pages (from-to)	309-357
Number of pages	49
Journal	Review of Financial Studies
Volume	33
Issue number	1
DOIs	https://doi.org/10.1093/rfs/hhz051 https://doi.org/10.1093/rfs/hhz051
Publication status	Published - 2020

Bibliographical note

JEL D86 - Economics of Contract: TheoryD92 - Intertemporal Firm Choice, Investment, Capacity, and FinancingG31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

Publisher Copyright:
© 2019 The Author(s) 2019. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected].

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Cite this

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AB - 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.

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Investment Timing and Incentive Costs^∗

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