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Asymmetric Information, Asset Allocation, and Debt Financing

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  • Anderson, Michael H
  • Prezas, Alexandros P

Abstract

We analyze a signaling game where firms' financing announcements convey private information about their prospects but a moral hazard problem exists in that managers may suboptimally invest. Consequently, the attempt to address an asymmetric information problem exacerbates moral hazard. The equilibrium recognizes both imperfect information problems. Additionally, the firm must determine how to allocate funds between two technologies differing in cash flow timing and managerial accessibility. We define an above-average firm's comparative advantage as that technology which is most dominant relative to a firm with lesser prospects and show that the resultant equilibria follow the lines of the firm's comparative advantage. Finally, we show that separation may be achieved costlessly, i.e., with no explicit signaling cost. Copyright 2003 by Kluwer Academic Publishers

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  • Anderson, Michael H & Prezas, Alexandros P, 2003. "Asymmetric Information, Asset Allocation, and Debt Financing," Review of Quantitative Finance and Accounting, Springer, vol. 20(2), pages 127-154, March.
    • Handle: RePEc:kap:rqfnac:v:20:y:2003:i:2:p:127-54
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    Cited by:

    1. Dimitrios Koutmos & Konstantinos Bozos & Dionysia Dionysiou & Neophytos Lambertides, 2018. "The timing of new corporate debt issues and the risk-return tradeoff," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 943-978, May.

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