Soft Information Production and Investment in Specific Assets

39 Pages Posted: 18 Nov 2018

See all articles by Shubhashis Gangopadhyay

Shubhashis Gangopadhyay

India Development Foundation; University of Gothenburg; University of Groningen, Faculty of Economics and Business, Students; Indian School of Public Policy

Radhika Lunawat

University of California, Irvine - Accounting Area

Clas Wihlborg

Chapman University; University West

Date Written: October 27, 2018

Abstract

We analyse how soft information acquired at a cost by a lender affects the debt contract between the lender and a project manager, and the manager’s incentive to invest in a specific asset. Under certain conditions, the lender chooses to acquire soft information about the profitability of the manager’s specific investment. The lender can increase the accuracy of the soft information by incurring greater costs. The project requires a debt financed general asset about which hard information is revealed. This information allows for a debt covenant, which allows the lender to terminate the project early. This ability contributes under specific conditions to the total return on the project, which is divided between the lender and the manager in a manner that depends on competitive condition in the loan market. We show how the manager’s incentive to invest in the specific asset is increasing in the accuracy of the soft information for a range of parameters. Under different conditions, the manager chooses a debt contract that does not rely on soft information and does not incorporate a debt covenant.

Keywords: Soft Information, Information Quality, Investment in Specific Asset, Project Termination, Revoking Debt Contract

JEL Classification: D82, D84, D86, M41

Suggested Citation

Gangopadhyay, Shubhashis and Lunawat, Radhika and Wihlborg, Clas, Soft Information Production and Investment in Specific Assets (October 27, 2018). Available at SSRN: https://ssrn.com/abstract=3273974 or http://dx.doi.org/10.2139/ssrn.3273974

Shubhashis Gangopadhyay

India Development Foundation ( email )

4101 DLF Phase IV
Gurugram, Haryana 122002
India
+91 9910991221 (Phone)

University of Gothenburg

Gothenburg
Sweden

University of Groningen, Faculty of Economics and Business, Students

Postbus 72
9700 AB Groningen
Netherlands

Indian School of Public Policy

Delhi
India

Radhika Lunawat (Contact Author)

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Clas Wihlborg

Chapman University ( email )

333 N. Glassell
Orange, CA 92866
United States
+17147447630 (Phone)

University West ( email )

Trollhättan, 46186
Sweden

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