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|Material Type:||Thesis/dissertation, Manuscript|
|Document Type:||Book, Archival Material|
|All Authors / Contributors:||
GREGORY KEITH DOW
A model of investment under uncertainty is developed in order to address these issues. The model of the firm is set in continuous time, and all agents are regarded as expected present value maximizers. The firm's profit function shifts through time according to a stochastic differential equation. The quality of information about future returns is reflected by knowledge of the parameters of this equation. Under 'symmetric information, ' this knowledge is identical for all capital market participants.
While under 'asymmetric information, ' the firm's owner/entrepreneur has better knowledge of these parameters than any other economic agent.
When information is asymmetric, the capital market may impose a binding constraint on the firm's choice of an investment policy. This constraint establishes a relationship between the firm's predicted investment rate and financial variables, such as operating profit and debt. While the signs of these liquidity effects are generally ambiguous, the ambiguity is removed under certain conditions. Observed investment then exhibits features which are often attributed to 'capital market imperfections'
Investment occurs more rapidly for liquid firms, and more slowly when a firm's prospects are poorly understood by outsiders. Some procedures for detecting capital market constraints are also suggested.