Wei Jiang

Positive hurdle rates without asymmetric information

Coauthor(s): Qi Chen.

Abstract:
We present a simple model where a firm will commit to a strictly positive hurdle rate on investment proposals by managers even though the two parties are symmetrically informed about the investments' profitability. Facing a positive hurdle rate, a manager who derives partial benefits from the investment profits will have more incentive to collect information about the projects. The optimal hurdle rate trades off the benefit of more information with the cost of foregoing ex post positive Net Present Value (NPV) projects.

Source: Finance Research Letters
Exact Citation:
Chen, Qi, and Wei Jiang. "Positive hurdle rates without asymmetric information." Finance Research Letters 1 (2004): 106-112.
Volume: 1
Pages: 106-112
Date: 2004