The Value of Waiting to Learn

The goal of this paper is to study irreversible investment under incomplete information. We extend McDonald and Siegel’s (1986) model to the case where the expected rate of return of the project cannot be observed but is known to be either low or high. Waiting and observing the realizations of the value of the project provides information to the investor who can update her beliefs about the true value of the expected return. Uncertainty increases the option value of waiting but damages the quality of the signal received. We show that beliefs follow a martingale and the optimal investment trigger depends on the degree of optimism. We draw a comparison between a Bayesian and non-updating belief investor and demonstrate that using the information accelerates investment. JEL classification: D81, D83, D92.