Financing New Investments under Asymmetric Information: A General Approach
AbstractWe study the efficiency of credit market equilibria when financial intermediaries cannot observe the riskiness or the returns of potential investment projects. With loan financing, there is over-investment in high-return, high-risk projects and under-investment in low-return, low-risk projects relative to the social optimum. If firms have the choice of equity finance, there is unambiguously over-investment under reasonable conditions. The well-known cases of Stiglitz and Weiss and of de Meza and Webb emerge as special cases. The results are extended to allow for signaling and screening equilibria.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1017.
Length: 32 pages
Date of creation: Jan 2004
Date of revision:
Credit Markets; Asymmetric Information;
Other versions of this item:
- Robin Boadway & Michael Keen, 2004. "Financing New Investments under Asymmetric Information: a General Approach," Cahiers de recherche 0407, CIRPEE.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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