Corporate investment and financing under asymmetric information

Erwan Morellec and Norman Schürhoff
Authors registered in the RePEc Author Service: Norman Schuerhoff

Journal of Financial Economics, 2011, vol. 99, issue 2, 262-288

Abstract: We develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. We show that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix. Using this result, we show that asymmetric information induces firms with good prospects to speed up investment, leading to a significant erosion of the option value of waiting to invest. Additionally, we demonstrate that informational asymmetries may not translate into a financing hierarchy or pecking order over securities. Finally, we generate a rich set of testable implications relating firms' investment and financing strategies, abnormal announcement returns, and external financing costs to a number of managerial, firm, and industry characteristics.

Keywords: Asymmetric; information; Financing; decisions; Endogenous; financing; constraints; Corporate; investment; Real; options (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (66)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:99:y:2011:i:2:p:262-288

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