Optimal Issuance under Information Asymmetry and Accumulation of Cash Flows

45 Pages Posted: 18 Nov 2013 Last revised: 20 Jul 2016

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Pavel Zryumov

University of Rochester - Simon Business School

Date Written: July 18, 2016

Abstract

We study the optimal timing of security issuance to finance a new project when the firm's assets in place have unobservable quality. Stochastic cash flows generated by assets in place reveal information about their quality and simultaneously reduce the required outside funding. A high-quality firm optimally delays issuance unless its accumulated cash or the market belief about its quality is sufficiently high. A low-quality firm does the same and, additionally, issues if market belief and accumulated cash are sufficiently low. Under stated restrictions, the renegotiation-proof optimal security pays outside investors in full before paying anything to original shareholders.

Keywords: dynamic information asymmetry, financing, cash flow accumulation, issuance delay, optimal security

JEL Classification: G31, G32

Suggested Citation

Strebulaev, Ilya A. and Zhu, Haoxiang and Zryumov, Pavel, Optimal Issuance under Information Asymmetry and Accumulation of Cash Flows (July 18, 2016). Rock Center for Corporate Governance at Stanford University Working Paper No. 164; Stanford University Graduate School of Business Research Paper No. 13-12. Available at SSRN: https://ssrn.com/abstract=2356144 or http://dx.doi.org/10.2139/ssrn.2356144

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pavel Zryumov

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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