Corporate Policies in a World with Information Asymmetry

Corporate Policies in a World with Information Asymmetry, World Scientific Publishing and Imperial College Press (London), 2015

12 Pages Posted: 28 May 2015

See all articles by Vipin K. Agrawal

Vipin K. Agrawal

University of Texas at San Antonio - Department of Finance

Ramesh K. S. Rao

University of Texas at Austin - Department of Finance

Date Written: October 11, 2014

Abstract

We study the firm’s financing and investment policies when the manager has private information about the firm’s cash flows. Prior research in this area places specific restrictions on: i) the nature of the manager’s private information and thus on the set of firms to which the theory applies, and ii) the set of securities that can be issued. This research relaxes both assumptions. Our generalization: i) identifies the economic primitives affecting the firm’s debt-equity choice, ii) shows that a wide cross-section of firms prefers equity to debt even when information asymmetry (IA) is the only imperfection, iii) rationalizes several empirical findings, and iv) yields new insights about how the manager can minimize IA costs through operational decisions and financing innovation.

Keywords: Information asymmetry, Financing choice, Investment policy, Corporate decision-making

JEL Classification: G30, G31, G32

Suggested Citation

Agrawal, Vipin Kumar and Rao, Ramesh K. S., Corporate Policies in a World with Information Asymmetry (October 11, 2014). Corporate Policies in a World with Information Asymmetry, World Scientific Publishing and Imperial College Press (London), 2015. Available at SSRN: https://ssrn.com/abstract=2610370

Vipin Kumar Agrawal (Contact Author)

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States

Ramesh K. S. Rao

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-475-8756 (Phone)
512-471-5073 (Fax)

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