The effect of asymmetric information on product market outcomes |
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| Authors: | Matthew T Billett Jon A Garfinkel Miaomiao Yu |
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| Institution: | 1. Kelley School of Business, Indiana University, 1309 E 10th Street, Bloomington, IN 47405-1701, United States;2. Tippie College of Business, University of Iowa, 108 John Pappajohn Business Building, Iowa City, IA 52242-1994, United States\n;3. Edwards School of Business, Saskatchewan University, 25 Campus Drive, Saskatoon, Saskatchewan S7N 5A7, Canada |
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| Abstract: | We explore how asymmetric information in financial markets affects outcomes in product markets. Difference-in-difference tests around brokerage house merger/closure events (which increase asymmetric information through reductions in analyst coverage) indicate worse industry-adjusted sales growth for shocked firms than for their peers. Our results are consistent with Bolton and Scharfstein's (1990) tradeoff between investor agency concerns and predation risk. Further support is found in stronger treatment effects among firms with ex ante greater agency concerns, financing constraints, asymmetric information, and those operating in ex ante more competitive (fluid) product market spaces. Our results are concentrated in industries where we can clearly identify either net firm entry or exit. |
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| Keywords: | Asymmetric information Analysts Market share G14 G24 L11 |
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