Efficient Financing under Asymmetric Information

Michael Brennan and Alan Kraus

Journal of Finance, 1987, vol. 42, issue 5, 1225-43

Abstract: This paper characterizes the conditions under which the adverse-selection problem, which may prevent a firm from issuing securities to finance an otherwise profitable investment, may be costlessly overcome by an appropriate choice of financing strategy. The conditions are specialized when the information asymmetry may be characterized by either a first-degree stochastic dominance or a mean-preserving spread ordering across possible distributions of firm earnings. Possible financing strategies which resolve the information asymmetry are discussed and the results are related to recent empirical findings concerning security issues. Copyright 1987 by American Finance Association.

Date: 1987
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