Asymmetric Information, Asset Allocation, and Debt Financing

Asymmetric Information, Asset Allocation, and Debt Financing 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. Review of Quantitative Finance and Accounting Springer Journals

Asymmetric Information, Asset Allocation, and Debt Financing

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Kluwer Academic Publishers
Copyright © 2003 by Kluwer Academic Publishers
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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