CORPORATE FINANCING UNDER HETEROGENEOUS BELIEFS

Weining Niu ()
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Weining Niu: International School of Business, Beijing International Studies University, No. 1, Ding Fu Zhuang Nan Li, Chaoyang District, Beijing 100024, P. R. China

Annals of Financial Economics (AFE), 2017, vol. 12, issue 04, 1-12

Abstract: The paper models firm’s optimal capital structure and stock price effects from the perspective of expectation equilibrium when manager and outside investors have heterogeneous prior and posterior beliefs on firm’s future cash flow. I find that the more optimistic (pessimistic) of outside investors and the more dispersion of beliefs between manager and outside investors, the higher (lower) the issuing price of stocks, the higher (lower) the issuing amount, hence the higher (lower) the proportion of equity capital in capital structure, and a higher positive (negative) stock price effect after security issuance. The numerical simulation also verifies the findings to some extent.

Keywords: Heterogeneous beliefs; corporate financing; capital structure; stock price effects (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S2010495217500191

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