Product Market Efficiency: The Bright Side of Myopic, Uninformed, and Passive External Finance

68 Pages Posted: 25 Feb 2008 Last revised: 20 Mar 2010

See all articles by Thomas H. Noe

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Thomas Rietz

University of Iowa - Henry B. Tippie College of Business

Date Written: March 1, 2010

Abstract

Short-term financial claims held by uninformed outside investors impose a tax on insider opportunism by diluting the ownership stake of opportunistic owner-managers. By thus limiting managerial opportunism, short-term financing increases firm value and social welfare. When given a choice, owner-managers will prefer socially beneficial short-term external financing over internal financing. We show that these results are equilibrium outcomes of a model where firms can act opportunistically in product markets. Moreover, we document the same beneficial effect of short-term external finance in a laboratory experiment implementing this game.

Keywords: Adverse selection, financing, reputation

JEL Classification: C91, D82, G31, G32, L15

Suggested Citation

Noe, Thomas H. and Rebello, Michael J. and Rietz, Thomas A., Product Market Efficiency: The Bright Side of Myopic, Uninformed, and Passive External Finance (March 1, 2010). AFA 2009 San Francisco Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1089070 or http://dx.doi.org/10.2139/ssrn.1089070

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Thomas A. Rietz (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

C108 PBB, Suite S244
Iowa City, IA 52242-1994
United States
319-335-0856 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://tippie.uiowa.edu/people/profile/profile.aspx?id=195021

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