The Effect of Asymmetric Information on Product Market Outcomes

51 Pages Posted: 19 Sep 2011 Last revised: 27 Apr 2016

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Miaomiao Yu

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Date Written: April 26, 2016

Abstract

We explore how asymmetric information in financial markets affects outcomes in product markets. Difference-in-difference tests around brokerage house merger/closure events (which increase asymmetric information through reductions in analyst coverage) indicate worse industry-adjusted sales growth for shocked firms than for their peers. Our results are consistent with Bolton and Scharfstein’s (1990) tradeoff between investor agency concerns and predation risk. Further support is found in stronger treatment effects among firms with ex-ante greater agency concerns, financing constraints, asymmetric information and those operating in ex-ante more competitive (fluid) product market spaces. Our results are concentrated in industries where we can clearly identify either net firm entry or exit.

Keywords: asymmetric information, market share

JEL Classification: G14, G24, L11

Suggested Citation

Billett, Matthew T. and Garfinkel, Jon A. and Yu, Miaomiao, The Effect of Asymmetric Information on Product Market Outcomes (April 26, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1929008 or http://dx.doi.org/10.2139/ssrn.1929008

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Jon A. Garfinkel (Contact Author)

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

Miaomiao Yu

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

LA 70803-6308
United States

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