Title: Investment Under Asymmetric
Co-author:Sheridan Titman (Boston College)
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:
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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