Top PDF Information Asymmetry About Investment Risk and Financing Choice

Information Asymmetry About Investment Risk and Financing Choice

Information Asymmetry About Investment Risk and Financing Choice

(2010)), precisely the firms that are deemed to be most affected by adverse selection costs in the traditional PO model. HH note that small and young firms are the ones most likely to be associated with greater information asymmetry about the risk of their future investments. Similarly, Fulghieri and Lukin, (2001, p. 5) find that “the likelihood that a firm will issue equity increases with the value of the project relative to the amount of external funds raised and with the extent of the informational asymmetry between insiders and outsiders.” Cooney and Kalay (1993) refine Myers and Majluf’s (1984) model and show that if the market anticipates a valuable project for the firm and the uncertainty surrounding the NPV of the new project is sufficiently large relative to assets- in-place, then stock price reaction would be positive in response to an equity issue announcement. This in turn implies a preference for equity financing. Cooney and Kalay (1993) suggest that high market-to-book value firms are likely to have greater uncertainty about the value of their investment opportunities than about the value of their assets-in-place, and hence are more likely to experience positive announcement effects. Wu and Wang (2005) show that taking into account the private benefits of control may yield predictions that diverge from the original Myers-Majluf. Their model shows that when the asymmetric information comes from growth rather than assets- in-place it is possible that the adverse selection cost of equity is actually reversed.
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The Effect of Petrochemical Industry on Relationship between Information Asymmetry about Investment Risk and Financing Choice

The Effect of Petrochemical Industry on Relationship between Information Asymmetry about Investment Risk and Financing Choice

Although it is generally accepted that information asymmetry has an impact on capital structure policy, the nature of the information asymmetry is not well understood. Recent theoretical works and empirical evidences suggest that financing choice depends upon the information asymmetry of the investment risk of using funds (Halov & Heider, 2012) (Rao, Mohanty, & Baxamusa, 2015). Consistent with this view, we analyzed the data gathered among 199 companies listed in Tehran Stock Exchange during 2009-2016 by the multiple linear regressions in order to check that the research hypotheses have been applied. We examined the influence of petrochemical industry on that relationship. The findings show that equity is used to fund projects with a greater information asymmetry of their risk such as intangible assets, while debt is used to fund investments with a lower information asymmetry of their risk such as capital expenditure and liquidity enhancement. We found out that the membership of petrochemical industry has no effect on the intangible assets, but, concerning the capital expenditure and working capital, the impact is significantly negative; the impact is significantly positive about cash holding. A B S T R A C T
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The Role of Information Asymmetry in Financing
Early Stage Ventures

The Role of Information Asymmetry in Financing Early Stage Ventures

There are two sorts of innovation, namely in-house innovation, (which is defined as Intrapreneurship) and innovation through start-ups (early stage companies) known as Entrepreneurship (Parker, 2011). Therefore, by definition in this thesis, the focus will be upon Entrepreneurship on early stage start-up companies. As stated earlier in the introduction, capital is needed in order to get these new young companies up and running. Capital is often provided to the company by private investors in order to receive financial rewards in return. However, private investors are willing to invest in early stage companies only when there is sufficient balance between risk and reward. Just a great idea is not enough to convince these private investors to commit their funds to a project. This is exactly why Brainport provides funds for Proof-of-Concept studies in the technology region. These Proof-of-Concept studies reduce investment risk and make clear which possible rewards can be reached with the specific innovative business idea.
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Informed trading, information asymmetry and pricing of information risk: Empirical evidence from the NYSE

Informed trading, information asymmetry and pricing of information risk: Empirical evidence from the NYSE

It is empirically challenging to fully measure all dimensions of private information, but at least a subset of such private information should arguably be revealed periodically to the market through the trading actions of investors with access to private value-relevant information. We empirically investigate information asymmetry through the use of two reasonably direct and most extensively used market microstructure measures – the PIN measure developed, tested and used in, for example, Easley and O'Hara (1992), Easley, et al. (1997a, b), and Easley, et al. (2002); and the adverse selection measure widely used to directly proxy for informed trading (Huang and Stoll (1996); Bessembinder and Kaufman (1997); and Hansch, et al. (1999)), representing the spread revenue lost, on average, by passive liquidity suppliers to liquidity demanders, the group that arguably includes informed investors demanding immediacy to extract rents from their in- formation before their information becomes fully incorporated into prices (Harris (2003, p. 226)). Throughout this paper, we use the terms “information asymmetry” and “informed trading” quite interchangeably, with the choice depending on the economic context of where they are used.
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The Impact of Information Asymmetry on the Bank Financing of SMEs in Algeria: An Econometric Study

The Impact of Information Asymmetry on the Bank Financing of SMEs in Algeria: An Econometric Study

Unlike the adverse selection problem that can occur prior to a transaction, the problem of moral hazard appears only after the contract, so that the borrower uses the finance obtained in unproductive or high risk activities, which increases the likelihood of default, This is Usually associated to the problem of agency [6], especially in the financial markets through the inability of managers of companies as agents of shareholders to maximize the wealth of these individuals, and bondholders also may be exposed to this type of problems, which raises the problem of how to guide the behavior of these agents in the direction of achieving the
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Information asymmetry, disclosure and foreign institutional investment: an empirical investigation of the impact of the Sarbanes-Oxley Act

Information asymmetry, disclosure and foreign institutional investment: an empirical investigation of the impact of the Sarbanes-Oxley Act

countries around the world, the well-developed U.S. financial system, and the overall stability of the U.S. economy, as reasons for the foreign capital inflows into the U.S. In principle, the analyses we ran in the previous paragraphs should address the possible impact of omitted variables on the FIO-SOX relationship. In addition, the use of year dummies in all of our models should capture the effect of cross-sectional dependence, that is, market-wide effects that could influence FIO. However, we run a further model specification, where instead of the year dummies we add two variables, which capture macroeconomic conditions; one that proxies for the implied risk in the U.S. economy (the Chicago Board Options Exchange Volatility Index; VIX) and another that captures the global economic growth (the weighted average GDP growth for all of the countries represented in our dataset; WVGDP). Even under this specification, the SOX coefficient remains positive and highly significant (untabulated result).
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Investigating Bhattacharya Hypothesis about the Effect of Dividend Signal on Information Asymmetry Risk: An Earnings Transparency Approach

Investigating Bhattacharya Hypothesis about the Effect of Dividend Signal on Information Asymmetry Risk: An Earnings Transparency Approach

The statistical population of this study consisted of all companies listed in Tehran Stock Exchange that meet the following requirements:1) They have to be listed in the Exchange before March 2005 and their stocks must have been available for trading since listing date, 2) The trading of their stocks shouldn`t have been stopped between years 2009 and 2013, 3) The end of their fiscal year must be March of each year (end of Iranian solar year) and their fiscal year needs to have remained unchanged between years 2009 and 2013. The main reason behind these criteria is to control the effects of time on the research findings. For example if some financial or political factor were to occur in a certain year, the effects will certainly be visible if the fiscal year ends at March 20 th while the effects might not be considered if the fiscal year ends in December 21 st (Note that Iranian year starts at March 21 st compared to Georgian calendar), 4) in order to information homogeneity, selected companies should not be in the list of financial and investment industries, 5) The book value of equity must be positive during the investigated period (Because of using Carhart model) ,and finally 6) The selected industry needs to at least include 10 companies which all meet the above criteria. Finally, 46 companies were studied in the time period of 2009 to 2013.
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ON THE IMPACT OF INFORMATION ASYMMETRY ON EVALUATION AND RISK OF CLUSTER PERFORMANCE

ON THE IMPACT OF INFORMATION ASYMMETRY ON EVALUATION AND RISK OF CLUSTER PERFORMANCE

Activities of business clusters are more closely embedded in the network because its location closeness promotes the exchange of information and the dissemination of knowledge. This brings advantages to business innovation capability and competence. On the other hand, it is unclear if this further brings benefits to the financing and what are the implications during the process of financing are unclear (Wang, 2015). In the usual case information asymmetry must be tolerated by the external investors. This is crucial point because the external financing in usual cases is the necessary condition for creation of innovations and business cluster activity from the one hand side. On the other hand, information asymmetry is necessary to ensure the confidence of the continuity of project. From the perspective of investor, it can look as a huge source of uncertainty and risk and it is the subject for negotiations, the available information for each agent is various in financial markets. First at all, there is a huge information asymmetry between the managers of company (and cluster too) and existing and possible investors. In addition, it is important to emphasize that the managers have prior information on whether the firm will default and the timing of the default. On the other hand, market investors do have different information (for more details, see Hillairet, Jiao).
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Contract structure, risk sharing and investment choice

Contract structure, risk sharing and investment choice

Columns 1 and 2 of Table 7 summarize net transfers from the partner with higher income under individual liability, joint liability and joint liability with approval. Columns 3 and 4 report the same information conditional on exactly one project in the pair succeeding. This corresponds to states hl and lh, where the direction of transfers is independent from assumptions about Pareto weights. If risk-sharing were complete, these transfers would equal one-half of the di¤erence between payo¤s; however, in each case transfers are well below the full risk-sharing benchmark. Joint liability with perfect monitoring generates the highest net transfers, 5.3, but this is only 27% of the full risk-sharing amount of 19.6. These shortfalls arise along both the extensive and intensive margins. For individual and joint liability contracts with perfect monitoring, either individual made a transfer in only 50% of all rounds. Under imperfect public monitoring, the probability of any transfer fell to 30%. Furthermore, when transfers were made, they tended to remain well below the full risk-sharing benchmark. Again, joint liability with perfect monitoring produces the largest net transfers relative to full insurance, but conditional on any transfer being made they still average only 43% of the full insurance amount. While transfers occur more often under joint liability with approval— in 72% of all rounds with perfect monitoring and 47% without— net transfers were smaller than those in other contracts.
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THE EFFECTS OF FINANCIAL REPORTING QUALITY ON INFORMATION ASYMMETRY AND ITS IMPACTS ON INVESTMENT EFFICIENCY

THE EFFECTS OF FINANCIAL REPORTING QUALITY ON INFORMATION ASYMMETRY AND ITS IMPACTS ON INVESTMENT EFFICIENCY

Financial reporting is the primary means of communicating financial information to external parties, which are used as a basis for decision making. Financial statement information will have a utility value if obtained from quality financial reporting. Understanding the quality of financial reporting can be viewed in two perspectives. The first view states that the quality of financial reporting related to the company's overall performance is illustrated in corporate profits. Associated with the quality of which measures are focused on attributes that are believed to affect FRQ such as earnings management, financial restatements, and timeliness. The second view states that the quality of financial reporting related to the performance of the company's shares in the capital market. Which is getting stronger relationship between income in exchange markets shows that financial reporting information is getting higher. With the quality of financial reporting it can protect investors in terms of investment and investment decisions. It becomes critical because the investment has risk. Based on previous studies have found an association between the quality of financial reporting with the efficiency of investment, this relationship occurs because of the quality of financial reporting will produce quality information. This research was conducted at 22 pension fund companies in Indonesia in 2012. These results indicate that: the quality of financial reporting did not affect the asymmetric information, and asymmetric information does not affect the efficiency of investment
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Information Asymmetry and Risk Transfer Markets

Information Asymmetry and Risk Transfer Markets

Parties use a contingent contract wherein all payments occur ex-post and all contracts are made with a risk neutral competitive market maker. With full information, risky sellers receive a lower price than safe sellers since counterparty risk is priced. With asymmetric information, risky sellers have a choice of whether to pool with safe sellers, or to reveal themselves. For any given price, risky counterparties will desire larger contract sizes than their safe counterparts due to limited liability. Therefore, if risky sellers pool with safe sellers, they are forced to supply less than they would like to at the pooling price in order to stay hidden. This tension creates an incentive for some risky sellers to deviate and reveal themselves; by doing so they will be able to trade more, albeit at a lower price. Even though the competitive equilibrium may feature some risky sellers fully revealing, the allocation is shown to be information constrained inefficient, since risky sellers do not internalize the cost that pooling has on safe sellers. In addition, pooling risky sellers do not internalize the effect that the contraction in supply due to pooling has on buyers. In particular, when the market maker has limits on the amount of inventory it can hold, the contraction in supply leads to an inefficiently low amount of risk transfer for buyers. 5 A social planner can effectively cross subsidize
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Contract Structure, Risk Sharing and Investment Choice

Contract Structure, Risk Sharing and Investment Choice

they made when successful did not increase with the riskiness of their investments or the expected default burden they placed on their partners. Increased risk-taking was not evident under joint liability with complete information, and when individuals were given explicit approval rights over their partners’investment choices, risk-taking fell below the autarky level. Together, these results indicate that increased risk-taking was not the product of cooperative insurance. They also suggest that peer monitor- ing mechanisms, as embodied in explicit project approval rights, not only prevent ex ante moral hazard but more generally discourage risky investments, irrespective of whether or not such risks are e¢ cient. This may in part explain why we see little evidence that micro…nance-funded businesses grow beyond subsistence entrepreneur- ship. It may also help us reconcile some of the anecdotal evidence on the limits of joint liability and the increasing willingness of micro…nance institutions to consider contracts other than joint liability. 6
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Informed Trading, Information Asymmetry and Pricing of Information Risk: Empirical Evidence from the NYSE

Informed Trading, Information Asymmetry and Pricing of Information Risk: Empirical Evidence from the NYSE

The average information content of order-imbalance seems also to differ by trade direc- tion. Buying pressure tends to be positively related to informed trading, while selling pressure is related to a lower level of informed trading. According to Aboody, Hughes, and Liu (2005) and Lakonishok and Lee (2001), this asymmetry could be due to buys involving a deliberate choice, potentially based on private information. Sales, however, additionally contain liquidity trades by employees that intend to divest stocks that are part of their compensation package (Aboody, et al. (2005); Lakonishok and Lee (2001)). Another potential reason for sales containing less informa- tion than buys are mutual funds that liquidate stock-positions resulting from mergers or stock- financed acquisitions by firms they are invested in (Harris (2003, p. 332)) and thereby became larger than their mandated maximum position. Consistent with theory (see, e.g., Kyle (1985)), the size of the daily order-imbalance position has a positive relationship with the level of informed trading.
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Efficient Predictor of Information Asymmetry

Efficient Predictor of Information Asymmetry

On the one hand, laws and regulations that permit profiting from favored access to information may retard economic growth because they allow a small elite to expropriate the returns from investing, discouraging investment by those outside the circle of privilege and raising the cost of capital (Manove (1989), Acemoglu, Johnson, and Robinson (2002), Easley and O’Hara (2004), Lambert, Leuz, and Verrecchia (2011)). Information asymmetry may also increase the cost of capital by making securities less liquid and useful for risk-sharing (Diamond and Verrecchia (1991), Gârleanu and Pedersen (2004), Vayanos and Wang (2012)). On the other hand, the risk of being on the unfavorable side of a trade may be fully diversifiable across companies, leaving the cost of capital unaffected (Hughes, Liu, and Liu (2007)). Allowing informed insiders to trade on their private information could cause asset prices to more accurately reflect fundamental value, reducing the cost of capital and increasing allocative efficiency (Manne (1966), Carlton and Fischel (1983), Leland (1992)).
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A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management

A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management

Neoclassical investment models (Hayashi (1982)) assume that the firm faces frictionless capital markets and that the Modigliani and Miller (1958) theorem holds. In reality, however, firms often face important external financing costs due to asymmetric information and managerial incentive problems. Following the classic writings of Jensen and Meckling (1976), Leland and Pyle (1977), and Myers and Majluf (1984), a large empirical literature seeks to measure these costs. For example, Asquith and Mullins (1986) find that the average stock price reaction to the announcement of a common stock issue is −3% and the loss in equity value as a percentage of the size of the new equity issue is −31%. Calomiris and Himmelberg (1997) estimate the direct transactions costs that firms face when they issue equity. These costs are also substantial. In their sample the mean transactions costs, which include underwriting, management, legal, auditing, and registration fees as well as the firm’s selling concession, are 9% of an issue for seasoned public offerings and 15.1% for initial public offerings.
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Investment and financing for SMEs with a partial guarantee and jump risk

Investment and financing for SMEs with a partial guarantee and jump risk

Our work. In this paper, we consider an SME who intends to invest in an irreversible project with entry flexibility but has a funding gap. After the irreversible investment, the project generates the cash flow that follows a double exponential jump-diffusion process. In contrast to traditional cor- porate finance theory, we assume that the SME is unable to obtain a loan directly from a bank because of high project risk, low credibility, and strong information asymmetry. To overcome such financing constraint, the SME enters into a partial guarantee agreement with an insurer and a lender. Ac- cording to the agreement, the lender lends cash to the SME and the insurer promises to undertake a fraction (guarantee level) of debt once the SME de- faults. In return, the SME (borrower) allocates a fraction of equity and a fixed guarantee fee rate per unit time to the insurer.
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Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act

Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act

countries around the world, the well-developed U.S. financial system, and the overall stability of the U.S. economy, as reasons for the foreign capital inflows into the U.S. In principle, the analyses we ran in the previous paragraphs should address the possible impact of omitted variables on the FIO-SOX relationship. In addition, the use of year dummies in all of our models should capture the effect of cross-sectional dependence, that is, market-wide effects that could influence FIO. However, we run a further model specification, where instead of the year dummies we add two variables, which capture macroeconomic conditions; one that proxies for the implied risk in the U.S. economy (the Chicago Board Options Exchange Volatility Index; VIX) and another that captures the global economic growth (the weighted average GDP growth for all of the countries represented in our dataset; WVGDP). Even under this specification, the SOX coefficient remains positive and highly significant (untabulated result).
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A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management

A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management

Another novel economic insight emerging from our analysis concerns the behavior of a financially constrained firm’s equity beta in terms of its cash holdings. One would expect equity beta to be higher for a financially constrained firm, as it reflects the firm’s exposure to both idiosyncratic and systematic risk, whereas the equity beta of an unconstrained (first-best) firm reflects only the firm’s exposure to systematic risk. This intuition is broadly valid in a static setting. However, in a dynamic setting where firms actively manage their cash holdings, a financially constrained firm can have a lower equity beta than an unconstrained firm. The reason is that such a firm is likely to hold a significant proportion of its assets in cash, which has a zero beta, while an unconstrained firm does not hold any cash. In addition, our model shows that returns on real investments depend on the financing constraints. Our model thus provides guidance on how to extend the neoclassical production based asset pricing framework (see Cochrane (1991)) and how to conduct asset pricing tests using investment returns of financially constrained firms.
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News About News: Information Arrival and Irreversible Investment

News About News: Information Arrival and Irreversible Investment

In this paper we have presented a basic framework for investigating the effect of the rate at which new information is expected to arrive on irreversible investment decisions; our model [r]

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Financing corporate investment

Financing corporate investment

Funds raised by nonfinancial corporations in credit and capital markets in the first 9 months of 1965 were at a seasonally adjusted annual rate of more than $20 billion, nearly $7 billio[r]

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