Corporate Investment and Financing Under Asymmetric Information
61 Pages Posted: 2 Apr 2009 Last revised: 2 Apr 2010
Date Written: March 30, 2010
We develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. We show that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix. Using this result, we show that asymmetric information induces firms with good prospects to speed up investment, leading to a significant erosion of the option value of waiting to invest. Additionally, we demonstrate that informational asymmetries may not translate into a financing hierarchy or pecking order over securities. Finally, we generate a rich set of testable implications relating firms' investment and financing strategies, abnormal announcement returns, and external financing costs to a number of managerial, firm, and industry characteristics.
Keywords: asymmetric information, financing decisions, investment timing
JEL Classification: G13, G14, G31, G34
Suggested Citation: Suggested Citation