Information Asymmetry, the Internet, and Securities Offerings

Abstract

In this Comment, prepared for a Forum on capital formation for small businesses, I express doubts about whether the Internet, as a new communication medium, will significantly reduce the cost of obtaining capital through a public or quasi-public offering. The most important single barrier standing between small companies and capital providers is information asymmetry?potential investors do not know, and cannot easily verify, the quality of the information that a company provides. The internet cannot do much to reduce information asymmetry costs, nor the costs of the reputational intermediaries that emerge in securities markets reduce information asymmetry. On the contrary, the Internet could increase information asymmetry costs by undercutting the effectiveness of the institutions that today provide investors with partial assurance of the quality of the information provided by issuers.