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Information Asymmetry and Valuation Effects of Debt Financing

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  • Alam, Pervaiz
  • Walton, Karen Schuele

Abstract

This study demonstrates that under conditions of information asymmetry, shareholders earn positive returns around the shelf registration date of straight debt. The results provide evidence to support Miller and Rock's conclusion that new expected financing by firms can result in positive returns to shareholders and Blazenko's contention that positive returns around the announcement date of straight debt issuance may be found by studying firms with asymmetric information. Firms with reported research and development expenses are assumed to have a higher level of asymmetric information and a greater chance of requiring new outside financing. Research and development expense intensity and abnormal earnings in future periods are found to be significant in a cross-sectional regression explaining abnormal returns for days surrounding the announcement period. Copyright 1995 by MIT Press.

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Bibliographic Info

Article provided by Eastern Finance Association in its journal The Financial Review.

Volume (Year): 30 (1995)
Issue (Month): 2 (May)
Pages: 289-311

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Handle: RePEc:bla:finrev:v:30:y:1995:i:2:p:289-311

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Web page: http://www.easternfinance.org/
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Web: http://www.blackwellpublishing.com/subs.asp?ref=0732-8516

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Cited by:
  1. Shouyong, Shi & Berentsen, Aleksander & Rojas Breu, Mariana, 2012. "Liquidity, Innovation and Growth," Economics Papers from University Paris Dauphine 123456789/7354, Paris Dauphine University.
  2. Hall, Bronwyn, 2002. "The Financing of Research and Development," Department of Economics, Working Paper Series qt5rf0x9gz, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. SAU, Lino, 2007. "New Pecking Order Financing for Innovative Firms: an Overview," MPRA Paper 3659, University Library of Munich, Germany.
  4. Suzan Hol & Nico van der Wijst, 2006. "The financing structure of non-listed firms," Discussion Papers 468, Research Department of Statistics Norway.
  5. Bronwyn H. Hall & Josh Lerner, 2009. "The Financing of R&D and Innovation," NBER Working Papers 15325, National Bureau of Economic Research, Inc.
  6. Aigbe Akhigbe & Anna Martin & Melinda Newman, 2011. "Sarbanes-Oxley wealth effects: focus on technology firms," Journal of Economics and Finance, Springer, vol. 35(2), pages 211-237, April.
  7. Takalo, Tuomas & Tanayama, Tanja, 2008. "Adverse selection and financing of innovation: is there a need for R&D subsidies?," Research Discussion Papers 19/2008, Bank of Finland.

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