Corporate Financing and Investment Decisions When Firms Have Informationthat Investors Do Not Have

61 Pages Posted: 21 Jun 2001 Last revised: 24 May 2013

See all articles by Stewart C. Myers

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Nicholas S. Majluf

Pontifical Catholic University of Chile

Date Written: July 1984

Abstract

This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions.The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities.The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.

Suggested Citation

Myers, Stewart C. and Majluf, Nicholas S., Corporate Financing and Investment Decisions When Firms Have Informationthat Investors Do Not Have (July 1984). NBER Working Paper No. w1396, Available at SSRN: https://ssrn.com/abstract=274547

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
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National Bureau of Economic Research (NBER)

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Nicholas S. Majluf

Pontifical Catholic University of Chile

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

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