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Financing New Investments under Asymmetric Information: A General Approach

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  • Boadway, Robin
  • Keen, Michael

Abstract

We 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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Suggested Citation

  • Boadway, Robin & Keen, Michael, 2004. "Financing New Investments under Asymmetric Information: A General Approach," Queen's Economics Department Working Papers 273453, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273453
    DOI: 10.22004/ag.econ.273453
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    2. Christian Keuschnigg & Soren Bo Nielsen, 2006. "Self-Selection and Advice in Venture Capital Finance," University of St. Gallen Department of Economics working paper series 2006 2006-06, Department of Economics, University of St. Gallen.
    3. Elena Del Rey & Bertrand Verheyden, 2011. "Loans, Insurance and Failures in the Credit Market for Students," CESifo Working Paper Series 3410, CESifo.
    4. Claudio A. Piga & Gianfranco Atzeni, 2007. "R&D Investment, Credit Rationing And Sample Selection," Bulletin of Economic Research, Wiley Blackwell, vol. 59(2), pages 149-178, April.
    5. Jörn Hendrich Block & Thorsten Staak & Philipp Tilleßen, 2007. "Ist das staatliche Eingreifen ins Gründungsgeschehen theoretisch legitimiert?," FEMM Working Papers 07007, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    6. Miglo, Anton, 2022. "Theories of financing for entrepreneurial firms: a review," MPRA Paper 115835, University Library of Munich, Germany.
    7. Fuest, Clemens & Tillessen, Philipp, 2005. "Why do governments use closed ended subsidies to support entrepreneurial investment?," Economics Letters, Elsevier, vol. 89(1), pages 24-30, October.
    8. Cieply, S. & Dejardin, M.A.F.G., 2009. "Entrepreneurial Finance in France: The Persistent Role of Banks," ERIM Report Series Research in Management ERS-2009-056-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

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    Keywords

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    JEL classification:

    • 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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