RISKY INVESTMENTS UNDER STATIC AND DYNAMIC INFORMATION ACQUISITION

Abstract

We show that under a dynamic information acquisition process, the investor's unconditional expected optimal quantity of information and investment amount are higher than those under the corresponding static information acquisition process. However, when the initial belief of the investment payoff is either high or low, static and dynamic information acquisitions provide similar expected results. To incentivize firms to acquire information and invest when the initial belief of a risky investment payoff is mediocre, governments should allow firms to obtain information dynamically. This has implications on, e.g., clinical trials. Furthermore, the falling marginal cost of information raises investment amounts and leverage, which leads to higher losses during crises. Hence, companies need to understand their tail risks better.