Investment timing, asymmetric information, and audit structure: A real options framework

This paper examines investment timing by the manager in a decentralized firm in the presence of asymmetric information. In particular, we incorporate an audit technology in the agency model developed by Grenadier and Wang [2005. Investment timing, agency, and information. Journal of Financial Economics 75, 493-533]. The implied investment trigger in the agency problem with auditing is larger than in the full-information problem, and smaller than in the agency problem without auditing. Nevertheless, the audit technology does not necessarily reduce inefficiency in the total social welfare.