Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior
AbstractThis paper summarizes recent developments in the theory of the firm that have arisen in examining the implications of imperfect information. It shows that a wide range of these models have similar implications for the likely reaction of firms to external environmental and policy changes. Two significant implications are (1) that firms behave as if they are risk averse individuals maximizing a utility function of terminal wealth (profitability) -- even when the risks involved are unsystematic -- and (2), in many circumstances, because this utility function is likely to be characterized by decreasing absolute risk aversion, firms are likely to respond significantly (and positively) to changes in cash flow and profitability. Together these two phenomena are able to account for a wide range of firm behaviors that have been empirically observed (both formally and informally) and that are difficult to explain in terms of the traditional theory of the firm. Furthermore, the responses of such firms to policy interventions are likely to differ significantly from those of neoclassical firms.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3359.
Date of creation: May 1990
Date of revision:
Publication status: published as American Economic Review, Volume 80, Number 2, pp. 160-165 (May 1990)
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 160-65, May.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruce C. Greenwald & Joseph E. Stiglitz, 1988.
"Financial Market Imperfections and Business Cycles,"
NBER Working Papers
2494, National Bureau of Economic Research, Inc.
- Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 77-114, February.
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American Finance Association, vol. 32(2), pages 371-87, May.
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