More haste less speed? Signaling through investment timing


American Economic Journal: Microeconomics

aout 2017, vol. 9, n°3, pp.148-186

Departments: Economics & Decision Sciences, GREGHEC (CNRS)

Keywords: JEL D21, D82, D83, D92, G31, G32)

We consider a cash-constrained firm learning on the value of an irreversible project at a privately-known speed. Under perfect information, the optimal date of investment may be non-monotonic in the learning speed: better learning increases the value of experimenting further, but also the speed of updating. Under asymmetric information, the firm uses its investment timing to signal confidence in the project and raise cheaper capital from uninformed investors, which may generate timing distortions: investment is hurried when learning is sufficiently fast, and delayed otherwise. The severity of the cash constraint affects the magnitude of the distortion, but not its direction