The Importance of Product Market Concerns When Timing of Irreversible Corporate Investment is a Signal

Abstract

The purpose of this paper is to include product market concerns to state-of-the-art analysis of real options under asymmetric information. Morellec and Schurhoff (2011) introduced a model with one-sided asymmetric information refuting the value of investment timing flexibility. This paper argues that in applications, multi-sided informational setups will often prevail due to e.g. product market concerns, and that using the one-sided setup in such applications, falsely erodes the value of investment timing flexibility. The paper contributes with novel justification of valuing flexibility by recognizing the potential value of keeping private information private due to e.g. the competition-induced cost of revealing information.