Title: Investment Under Asymmetric Information

Co-author:Sheridan Titman (Boston College)

Status: Citation:

Daniel, Kent D. and Sheridan Titman (1995) Investment under asymmetric information. In Robert A. Jarrow, Voijslav Maksimovic, and William T. Ziemba, editors, Finance, Handbooks in Operations Research and Management Science, volume 9, chapter 23, pages 721--766. North Holland: Amsterdam.

Abstract: A number of articles have analyzed the firm's decision to issue equity when manager's have better information than investors. This chapter reviews these articles within the framework of a model that allows us to compare the efficiency of the various signals introduced in the articles. We show that a number of the proposed signals are uniform cost or money burning signals, and show that there is a crucial distinction among these signals, depending on whether the signalling cost is incurred before or after the realization of cash flows. Other proposed signals are shown to be either more or less efficient than burning money, depending on the nature of the information asymmetry. In some cases a combination of signals is optimal. We also analyze the literature that examines how these issues contribute to the firm's debt/equity choice.

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