Multi-Stage Investment, Long-Term Asymmetric Information and Pecking Order Revisited
Journal of Current Issues in Finance, Business, and Economics, 2012, Volume 4, Number 4, pp. 43-59
Posted: 25 Mar 2008 Last revised: 4 Mar 2020
There are 2 versions of this paper
Multi-Stage Investment, Long-Term Asymmetric Information and Pecking Order Revisited
Date Written: March 17, 2008
Abstract
Following some recent empirical papers we focus on the key feature of Pecking-order theory (POT) - the existence and the extent of asymmetric information between firms' insiders and outsiders. We analyze the debt-equity choice for financing a two-stage investment and consider different informational structures. When private information is short-term, equilibria are consistent with POT. When private information is long-term, equilibria may exist where high quality firms issue equity which are not consistent with POT. This clarifies the role of asymmetric information in explaining equity issues and provides new tools for researchers testing POT.
Keywords: pecking-order theory, long-term asymmetric information, signalling equilibrium, afterissuing underperformance
JEL Classification: D82, D92, G24, G32
Suggested Citation: Suggested Citation