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http://ssrn.com/abstract=2356144
 
 

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Dynamic Information Asymmetry, Financing, and Investment Decisions


Ilya A. Strebulaev


Stanford University - Graduate School of Business; National Bureau of Economic Research

Haoxiang Zhu


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Pavel Zryumov


Stanford Graduate School of Business

January 26, 2014

Rock Center for Corporate Governance at Stanford University Working Paper No. 164
Stanford University Graduate School of Business Research Paper No. 13-12

Abstract:     
We reexamine the classic yet static information asymmetry model of Myers and Majluf (1984) in a fully dynamic market. A firm has access to an investment project and can finance it by debt or equity. The market learns the quality of the firm over time by observing cash flows generated by the firm's assets in place. In the dynamic equilibrium, the firm optimally delays investment, but investment eventually takes place. In a "two-threshold" equilibrium, a high-quality firm invests only if the market's belief goes above an optimal upper threshold, while a low-quality firm invests if the market's belief goes above the upper threshold or below a lower threshold. However, a different "four-threshold" equilibrium can emerge if cash flows are sufficiently volatile. Relatively risky growth options are optimally financed with equity, whereas relatively safe projects are financed with debt, in line with stylized facts.

Number of Pages in PDF File: 63

Keywords: dynamic information asymmetry, investment, financing, pecking order

JEL Classification: G31, G32

working papers series


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Date posted: November 18, 2013 ; Last revised: February 4, 2014

Suggested Citation

Strebulaev, Ilya A. and Zhu, Haoxiang and Zryumov, Pavel, Dynamic Information Asymmetry, Financing, and Investment Decisions (January 26, 2014). Rock Center for Corporate Governance at Stanford University Working Paper No. 164; Stanford University Graduate School of Business Research Paper No. 13-12. Available at SSRN: http://ssrn.com/abstract=2356144 or http://dx.doi.org/10.2139/ssrn.2356144

Contact Information

Ilya A. Strebulaev
Stanford University - Graduate School of Business ( email )
655 Knight Way
Stanford, CA 94305-5015
United States
HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Haoxiang Zhu (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 MEMORIAL DRIVE
E62-416
Cambridge, MA 02142-1347
United States
HOME PAGE: http://www.mit.edu/~zhuh
Pavel Zryumov
Stanford Graduate School of Business ( email )
655 Knight Way
Stanford, CA 94305
United States
HOME PAGE: http://stanford.edu/~pzryumov/

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