Information Asymmetry, Mispricing and Security Issuance

Abstract

I examine the effects of information asymmetry-driven mispricing on security issuance. Employing pre-disclosure changes in purchase obligations as a proxy for information asymmetry-driven mispricing, I find that managers avoid (prefer) issuing securities when they perceive their firms to be undervalued (overvalued) based on their superior information. The effects of information asymmetry-driven mispricing are stronger on equity issuance than debt issuance. Consequently, undervaluation (overvaluation) causes an increase (decrease) in financial leverage. These effects are more pronounced among firms with greater information asymmetry. The stock-trading and option-exercise patterns that managers follow suggest that their perceived mispricing is an important determinant in both private and firm-level decisions.

Keywords: Market timing, mispricing, information asymmetry, security issuance, capital structure

JEL Classification: G30, G32