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Corporate investment and financing under asymmetric information

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  • Morellec, Erwan
  • Schürhoff, Norman

Abstract

We develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. We show that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix. Using this result, we show that asymmetric information induces firms with good prospects to speed up investment, leading to a significant erosion of the option value of waiting to invest. Additionally, we demonstrate that informational asymmetries may not translate into a financing hierarchy or pecking order over securities. Finally, we generate a rich set of testable implications relating firms' investment and financing strategies, abnormal announcement returns, and external financing costs to a number of managerial, firm, and industry characteristics.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 99 (2011)
Issue (Month): 2 (February)
Pages: 262-288

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Handle: RePEc:eee:jfinec:v:99:y:2011:i:2:p:262-288

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Asymmetric information Financing decisions Endogenous financing constraints Corporate investment Real options;

References

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Citations

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Cited by:
  1. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
  2. Steven Grenadier & Andrey Malenko & Ilya A. Strebulaev, 2012. "Investment Busts, Reputation, and the Temptation to Blend in with the Crowd," NBER Working Papers 17945, National Bureau of Economic Research, Inc.
  3. Nishihara, Michi & Shibata, Takashi, 2013. "The effects of external financing costs on investment timing and sizing decisions," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1160-1175.
  4. Takahiro Watanabe, 2012. "Real Options and Signaling in Strategic Investment Games," KIER Working Papers 809, Kyoto University, Institute of Economic Research.
  5. Nishihara, Michi & Shibata, Takashi, 2011. "The effects of costly exploration on optimal investment timing," Review of Financial Economics, Elsevier, vol. 20(3), pages 105-112, August.
  6. Mikhail Drugov & Rocco Macchiavello, 2014. "Financing Experimentation," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 315-49, February.
  7. Grenadier, Steven R. & Malenko, Andrey & Strebulaev, Ilya A., 2014. "Investment busts, reputation, and the temptation to blend in with the crowd," Journal of Financial Economics, Elsevier, vol. 111(1), pages 137-157.
  8. Lyandres, Evgeny & Zhdanov, Alexei, 2014. "Convertible debt and investment timing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 21-37.
  9. Bruno Coric, 2010. "Investments and capital market imperfections, identification issues: a survey," Financial Theory and Practice, Institute of Public Finance, vol. 34(4), pages 407-434.

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