Real Option and Investment Decision

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In this research, the situation where there exists agency relationship between manager and investors is considered. Investors are contract with managers to run their company. Usually there are conflicts of interest called agency problem. One of the causes of the agency problem is a difference of the time horizon between two parties. It is modeled via the real option problem which enables us to deal with the flexibility of the management. For example the manager has an opportunity to reduce the size of investment by introducing a new technology which is costly. The effects of time horizon are analyzed.Empirical study around SEOs(Seasoned Equity Offering) are also analyzed. Especially the cumulative abnormal return around Japanese SEO and the effect of law reforms are reported.