Asymmetric Information,Asset Allocation,and Debt Financing |
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Authors: | Anderson Michael H. Prezas Alexandros P. |
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Affiliation: | (1) Charlton College of Business, University of Massachusetts-Dartmouth, 285 Old Westport Road, North Dartmouth, MA, 02747;(2) Sawyer School of Management, Suffolk University, 8 Ashburton Place, Boston, MA 02108 |
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Abstract: | 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. |
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Keywords: | corporate finance empire building game theory signaling |
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