The Effect of Asymmetric Information on Product Market Outcomes
51 Pages Posted: 19 Sep 2011 Last revised: 27 Apr 2016
Date Written: April 26, 2016
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: Suggested Citation