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Corporate Financing Under Heterogeneous Beliefs

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  • WEINING NIU

    () (International School of Business, Beijing International Studies University, No. 1, Ding Fu Zhuang Nan Li, Chaoyang District, Beijing 100024, P. R. China)

Abstract

The paper models firm’s optimal capital structure and stock price effects from the perspective of expectation equilibrium when manager and outside investors have heterogeneous prior and posterior beliefs on firm’s future cash flow. I find that the more optimistic (pessimistic) of outside investors and the more dispersion of beliefs between manager and outside investors, the higher (lower) the issuing price of stocks, the higher (lower) the issuing amount, hence the higher (lower) the proportion of equity capital in capital structure, and a higher positive (negative) stock price effect after security issuance. The numerical simulation also verifies the findings to some extent.

Suggested Citation

  • Weining Niu, 2017. "Corporate Financing Under Heterogeneous Beliefs," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-12, December.
  • Handle: RePEc:wsi:afexxx:v:12:y:2017:i:04:n:s2010495217500191
    DOI: 10.1142/S2010495217500191
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    References listed on IDEAS

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