Capital Budgeting Under Asymmetric Information: A Simplified Approach

Abstract:     
This paper provides a simplified framework to explain capital budgeting under conditions of asymmetric information. The model could be inserted into financial management textbooks, and it could easily be included in many financial management courses. The framework does more than merely to show how to calculate the gain in shareholder wealth when undertaking a project. It also provides a perspective on why firms may adopt certain types of financing policies: a perspective that is not fully explored in textbook presentations of capital budgeting.

JEL Classification: G31

Accepted Paper Series