| Capital allocation decisions have long captured the attention of economists. This works continues this abiding interest by looking at the broad-ranging topic of capital allocation from two different perspectives. In one instance it will focus on a firm's strategic decision to make a capital outlay in order to enter a competitive market. In another instance it will focus on the individual investment policies of public firms. The common thread between them is that they are both concerned with the role of informational asymmetries on the investment decision(s). In this respect, the importance and value of that additional information is emphasized.;In the first paper, I analyze two interactive firms, one with private information and the other without, who must decide when to undertake an irreversible and uncertain investment decision. Traditional non-strategic models of irreversible investment under uncertainty involve a single decision maker and result in an optimal period of delay before the investment is undertaken. In a strategic setting, firms must balance their desire to delay against competitive advantages from early investment. I find that an equilibrium may not exist within the standard continuous framework when the private information is over revenues. Moreover, when an equilibrium does exist the ability of the uninformed firm to exert competitive pressures is significantly impaired. This is in contrast to existing models with asymmetric information over costs, where an equilibrium always exists and the competitive pressures remain strong (Hsu and Lambrecht 2007). This work shows that the investment timing decision, and thus the value of the private information, is highly sensitive to the nature of incomplete information.;The second paper studies the investment decisions of U.S. firms with private information over the rest of the market. Theoretical work has long suggested that equity-based compensation induces firm managers to make investment decisions which favor equity holders at the expense of bondholders, resulting in a riskier investment policy. When or how managers are able to execute their preferred investment policy is not well defined. I propose that managers possess private information that allows them to engage in equity maximizing behavior more often. Furthermore, I suggest that analyst coverage reduces manager's private information and thus induces firm maximizing behavior. I test two hypotheses that are consistent with this proposition. The first is based on the asset substitution problem, as defined in Jensen and Meckling (1976). I show that uncovered firms invest in riskier assets than covered firms. The second test is based on the investment timing problem, as defined in Mauer and Sarkar (2005). I show that the investment policies of uncovered firm are less sensitive to uncertainty than covered firms.;The third paper studies the effect of private information on the decisions of Mexican firms, using the same methodology outlined in the second paper. In contrast to the results for U.S. firms, there is no evidence in favor of the proposition. A couple of possible explanations for the disparity are explored, including the immaturity of the secondary corporate debt market and the lack of credibility among analysts. Further research is needed to explore the validity of either explanation or alternative explanations. |
