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Information Asymmetry And Capital Structure
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Book Synopsis Corporate Finance Under Asymmetric Information by : Ejike Ezejiofor
Download or read book Corporate Finance Under Asymmetric Information written by Ejike Ezejiofor and published by GRIN Verlag. This book was released on 2014-11-18 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2014 in the subject Economics - Finance, , course: MBA and Engineering, language: English, abstract: The specter of decreased economic activities, financial crisis, unbecoming ethical standards have in the recent past and fore going, characterized asymmetric information on corporate finance. The consequences normally have a ricochet effect and can be generally catastrophic to normal economic activities to mention the least. This paper considers scenario’s where information asymmetry was prevalent or may have had its effects play out. The typical investor mindset and the opportunity cost associated with the preferred capital structure of the capitalizing process were mentioned. A basis for proper appreciation of the concept – Corporate finance under asymmetric information was initiated here, with a detailed explanation of corporate finance and its components, this was succeeded by a summary of scenarios were asymmetric information were prevalent and an intelligent look was also taken at asymmetric information between insiders and investors and the concomitant lemon problem, where the effects were carefully highlighted in a progression to the level of severity - Market breakdown and costly signaling. The fact that asymmetric information has been widely recognized as bad and generally viewed in a negative light must warrant it being viewed with a high level of seriousness. It is widely known that while lot of effort have been put into stemming the tides of the consequences of asymmetric information, a lot of effort too, have been dedicated to innovation and risk assessment, to capture the interest of investors, who have been affected by the consequences of asymmetric information. These may have formed a veritable platform for a recent paper by Pierre Barbaroux (2014), that elucidated the rise of innovation and innovative entrepreneurs based on the management of asymmetric information. An attempt has in any case, been made here to suggest efforts at marginalizing the negative impacts of asymmetric information and also remedies at reducing the far reaching impacts on the lenders and the aggregate economic activity in general.
Book Synopsis Information Asymmetry and Capital Structure by : Reining Petacchi
Download or read book Information Asymmetry and Capital Structure written by Reining Petacchi and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study uses Regulation Fair Disclosure (FD) as a plausibly exogenous shock to the information environment to identify the causal effect of information asymmetry on corporate financing behavior. Although Regulation FD prevents firms from selectively disclosing material information to market professionals in the equity market, firms can still do so to banks and rating agencies in the debt market. The standard's differential disclosure requirements lead to differential changes in the information environments between the two markets, providing a reasonably useful setting to examine the effect of information asymmetry on firms' capital structure. I find that firms with a high level of information asymmetry increase debt more than firms with a low level of information asymmetry post-Regulation FD. The results suggest that managers adjust the target leverage ratios to rely more on debt when facing higher costs of equity.
Book Synopsis Corporate Policies In A World With Information Asymmetry by : Ramesh K S Rao
Download or read book Corporate Policies In A World With Information Asymmetry written by Ramesh K S Rao and published by World Scientific. This book was released on 2015-08-24 with total page 174 pages. Available in PDF, EPUB and Kindle. Book excerpt: A corporate manager typically oversees several ongoing projects and has the opportunity to invest in new projects that add wealth to the stockholders. Such new projects include expanding the corporation's existing business, entering into a new line of business, acquiring another business, and so on. If the firm does not have sufficient internal capital (cash) to finance the initial investment, the manager must enter into a transaction with outside investors to raise additional funds.In this situation, the manager of a public corporation faces two key decisions:Modern corporate finance theory, originating with the seminal work of Merton Miller and Franco Modigliani, has demonstrated that these decisions depend on the information that the manager and investors have about the firm's future cash flows.In this book, the authors examine these decisions by assuming that the manager has private information about the firm's future cash flows. They provide a unified framework that yields new theoretical insights and explains many empirical anomalies documented in the literature.
Book Synopsis Capital Structure and Corporate Financing Decisions by : H. Kent Baker
Download or read book Capital Structure and Corporate Financing Decisions written by H. Kent Baker and published by John Wiley & Sons. This book was released on 2011-03-31 with total page 504 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive guide to making better capital structure and corporate financing decisions in today's dynamic business environment Given the dramatic changes that have recently occurred in the economy, the topic of capital structure and corporate financing decisions is critically important. The fact is that firms need to constantly revisit their portfolio of debt, equity, and hybrid securities to finance assets, operations, and future growth. Capital Structure and Corporate Financing Decisions provides an in-depth examination of critical capital structure topics, including discussions of basic capital structure components, key theories and practices, and practical application in an increasingly complex corporate world. Throughout, the book emphasizes how a sound capital structure simultaneously minimizes the firm's cost of capital and maximizes the value to shareholders. Offers a strategic focus that allows you to understand how financing decisions relates to a firm's overall corporate policy Consists of contributed chapters from both academics and experienced professionals, offering a variety of perspectives and a rich interplay of ideas Contains information from survey research describing actual financial practices of firms This valuable resource takes a practical approach to capital structure by discussing why various theories make sense and how firms use them to solve problems and create wealth. In the wake of the recent financial crisis, the insights found here are essential to excelling in today's volatile business environment.
Book Synopsis Bank Funding Structures and Risk by : Mr.Francisco F. Vazquez
Download or read book Bank Funding Structures and Risk written by Mr.Francisco F. Vazquez and published by International Monetary Fund. This book was released on 2012-01-01 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.
Book Synopsis Asymmetric Information and the Market Structure of the Banking Industry by : Mr.Giovanni Dell'Ariccia
Download or read book Asymmetric Information and the Market Structure of the Banking Industry written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 1998-06-01 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper analyzes the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. All lenders face uncertainty with regard to borrowers’ creditworthiness, but, in the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. These informational asymmetries are an important determinant of the industry structure and may represent a barrier to entry for new banks. The paper shows that, in contrast with traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of fixed costs.
Book Synopsis A Theory of Capital Structure Under Moral Hazard and Asymmetric Information by : Yul Wha Lee
Download or read book A Theory of Capital Structure Under Moral Hazard and Asymmetric Information written by Yul Wha Lee and published by . This book was released on 1989 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Capital Structure Choice, Information Asymmetry and Debt Capacity by : Surenderrao Komera
Download or read book Capital Structure Choice, Information Asymmetry and Debt Capacity written by Surenderrao Komera and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the relevance of the pecking order theory of capital structure among emerging market firms in the light of their debt capacity concerns. We consider the financing choices of all public listed Indian firms during 1992 to 2011 for the empirical analysis. The estimated annual pecking order coefficients range from 0.23 to 0.56, rejecting the argument that sample firms follow the pecking order while making their financing choices.We find that the pecking order theory fares poorly among firms that face higher asymmetric information costs. It is found to be performing relatively better among firms without debt capacity concerns. We also report an improvement in the pecking order coefficient once the concave nature of the relationship between debt issuances and financial deficit is considered. However, the pecking order approach when nested in the conventional leverage regression model, adds abysmally small amount of explanatory power. Overall, we argue that the pecking order theory fails to explain sample firms' financing choices.
Book Synopsis Asymmetric Information, Corporate Finance, and Investment by : R. Glenn Hubbard
Download or read book Asymmetric Information, Corporate Finance, and Investment written by R. Glenn Hubbard and published by University of Chicago Press. This book was released on 2009-05-15 with total page 354 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this volume, specialists from traditionally separate areas in economics and finance investigate issues at the conjunction of their fields. They argue that financial decisions of the firm can affect real economic activity—and this is true for enough firms and consumers to have significant aggregate economic effects. They demonstrate that important differences—asymmetries—in access to information between "borrowers" and "lenders" ("insiders" and "outsiders") in financial transactions affect investment decisions of firms and the organization of financial markets. The original research emphasizes the role of information problems in explaining empirically important links between internal finance and investment, as well as their role in accounting for observed variations in mechanisms for corporate control.
Book Synopsis Credit Rating and the Impact on Capital Structure by : Christian Kronwald
Download or read book Credit Rating and the Impact on Capital Structure written by Christian Kronwald and published by GRIN Verlag. This book was released on 2010-03 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2009 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, University of Hohenheim (Lehrstuhl für Bankwirtschaft und Finanzdienstleistungen), language: English, abstract: The question about capital structure is one of the most important issues which the management of a company faces in implementing their daily business. Therefore, the question of which factors affect capital structure decisions attracts high attention in the past and recent literature on capital structure. There are many papers providing valuable insights into capital structure choices, starting with the paper of Modigliani and Miller (1958). The MM-Theorem is generally considered a purely theoretical result since it ignores important factors in the capital structure decision like bank-ruptcy costs, taxes, agency costs and information asymmetry. Based on this paper many other theories which consider factors neglected by Modigliani and Miller have been evolved. Two major theories are the Tradeoff- and the Pecking-Order-Theory. The former loosens assumptions stated in the MM-Theorem by including bankruptcy costs and taxes while the latter introduces information asymmetry into the capital structure discussion. Chapter 2.1 will give a brief overview of these theories. For complexity reasons these models cannot capture all relevant factors affecting the capital structure policy of a company. However, all these theories disregard one cru-cial factor which plays an important role on capital markets all over the world. The significance of Credit Ratings is gradually increasing, and it is doing so in many re-spects. This paper focuses on the Credit Rating-Capital Structure-Hypotheses (CRCS) developed by Darren J. Kisgen as a modern approach to the capital structure discussion. The hypothesis argues that credit ratings have an impact on capital struc-ture decisions due to discrete costs (benefits) associated with a rating change. Firstly,
Book Synopsis Asymmetric Information in Financial Markets by : Ricardo N. Bebczuk
Download or read book Asymmetric Information in Financial Markets written by Ricardo N. Bebczuk and published by Cambridge University Press. This book was released on 2003-08-21 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asymmetric information (the fact that borrowers have better information than their lenders) and its theoretical and practical evidence now forms part of the basic tool kit of every financial economist. It is a phenomenon that has major implications for a number of economic and financial issues ranging from both micro and macroeconomic level - corporate debt, investment and dividend policies, the depth and duration of business cycles, the rate of long term economic growth - to the origin of financial and international crises. Asymmetric Information in Financial Markets aims to explain this concept in an accessible way, without jargon and by reducing mathematical complexity. Using elementary algebra and statistics, graphs, and convincing real-world evidence, the author explores the foundations of the problems posed by asymmetries of information in a refreshingly accessible and intuitive way.
Book Synopsis Information Risk and Capital Structure by : Prasun Agarwal
Download or read book Information Risk and Capital Structure written by Prasun Agarwal and published by . This book was released on 2007 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we investigate the effects of information asymmetry across equity investor groups as an explanation for the capital structure decisions of the firm. We test empirically whether differences in information across outside investors have any bearing on the leverage ratios of firms and on their choice of financing instrument when raising external capital. We use the probability of information-based trading (PIN) estimated using trade based data to test our theory. We find that firms with higher information risk (extrinsic information asymmetry across groups of investors) measured using PIN have higher market leverage. Extrinsic information asymmetry also seems to play a significant role in the firm's decision to issue debt or equity when raising capital, with high PIN firms more likely to issue debt. Comparing firms that issued debt and repurchased equity in the same year (increased leverage) with those that issued equity and repurchased debt in the same year (decreased leverage), we find firms with higher extrinsic information asymmetry are more likely to increase their leverage. These results strongly support the hypothesis that information risk affects capital structure after controlling for information asymmetry between firm managers and outside investors.
Book Synopsis Capital Structure Puzzle by : Stewart C. Myers
Download or read book Capital Structure Puzzle written by Stewart C. Myers and published by . This book was released on 1984 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper contrasts the "static tradeoff" and "pecking order" theories of capital structure choice by corporations. In the static tradeoff theory, optimal capital structure is reached when the tax advantage to borrowing is balanced, at the margin, by costs of financial distress. In the pecking order theory, firms preferinternal to external funds, and debt to equity if external funds are needed. Thus the debt ratio reflects the cumulative requirement for external financing. Pecking order behavior follows from simple asymmetric information models. The paper closes with a review of empirical evidence relevant to the two theories.
Book Synopsis Capital Structure by : Ahmed Riahi-Belkaoui
Download or read book Capital Structure written by Ahmed Riahi-Belkaoui and published by Praeger. This book was released on 1999-02-28 with total page 238 pages. Available in PDF, EPUB and Kindle. Book excerpt: This text uses theoretical and contingency approaches to examine the question of whether capital structure can be determined. Using a bond rating model it looks at the evaluation of capital structure, the resolution of issues pertaining to equity and liabilities, and their contribution to reports
Book Synopsis Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications by : Efraim Sadka
Download or read book Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications written by Efraim Sadka and published by International Monetary Fund. This book was released on 1998-11-01 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy. It shows the inadequacy of capital investment because its scope is too narrow and the investment each firm makes is too little. An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.
Book Synopsis Bank-based and Market-based Financial Systems by : Asl? Demirgüç-Kunt
Download or read book Bank-based and Market-based Financial Systems written by Asl? Demirgüç-Kunt and published by World Bank Publications. This book was released on 1999 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Does Asymmetric Information Drive Capital Structure Decisions? by : Sreedhar T. Bharath
Download or read book Does Asymmetric Information Drive Capital Structure Decisions? written by Sreedhar T. Bharath and published by . This book was released on 2018 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a novel information asymmetry index based on measures of adverse selection developed by the market microstructure literature, we test if information asymmetry is an important determinant of capital structure decisions, as suggested by the pecking order theory. Our index relies exclusively on measures of the market's assessment of adverse selection risk rather than on ex ante firm characteristics. We find that information asymmetry does affect the capital structure decisions of U.S. firms over the sample period 1973-2002. Our findings are robust to controlling for conventional leverage factors (size, Q ratio, tangibility, profitability) and several firm attributes, such as funding needs, sales growth, real investment, stock return volatility, stock turnover, and intensity of insider trading. For example, we estimate that on average, for every dollar of financing deficit to cover, firms in the highest adverse selection decile issue 30 cents of debt more than firms in the lowest decile. Overall, this evidence explains why the pecking order theory is only partially successful in explaining all of firms' capital structure decisions. It also suggests that the theory finds support when its basic assumptions hold in the data, as it should reasonably be expected of any theory.
