Information asymmetry and corporate investment decisions: A dynamic approach

Shih Chuan Tsai

doi:10.1111/j.1540-6288.2008.00193.x

Information asymmetry and corporate investment decisions: A dynamic approach

Shih Chuan Tsai^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

12 Citations (Scopus)

Abstract

This paper develops a dynamic model of the financing and operating decisions of firms in the presence of information asymmetry. When the value of growth opportunities is not fully recognized, securities are undervalued, thus influencing the financing and investment decisions. The agency-based underinvestment problem is re-examined under information asymmetry. For firms with greater growth opportunities, the investment distortion resulting from information asymmetry is especially significant. Information asymmetry also increases the expected bankruptcy cost. The cost of information asymmetry in terms of both the firm value and the information spread under the optimal capital structure could be substantial.

Original language	English
Pages (from-to)	241-271
Number of pages	31
Journal	Financial Review
Volume	43
Issue number	2
DOIs	https://doi.org/10.1111/j.1540-6288.2008.00193.x
Publication status	Published - 2008 May
Externally published	Yes

Keywords

Endogenous default
Growth option
Information asymmetry
Investment distortion

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1111/j.1540-6288.2008.00193.x

Cite this

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AB - This paper develops a dynamic model of the financing and operating decisions of firms in the presence of information asymmetry. When the value of growth opportunities is not fully recognized, securities are undervalued, thus influencing the financing and investment decisions. The agency-based underinvestment problem is re-examined under information asymmetry. For firms with greater growth opportunities, the investment distortion resulting from information asymmetry is especially significant. Information asymmetry also increases the expected bankruptcy cost. The cost of information asymmetry in terms of both the firm value and the information spread under the optimal capital structure could be substantial.

KW - Endogenous default

KW - Growth option

KW - Information asymmetry

KW - Investment distortion

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Information asymmetry and corporate investment decisions: A dynamic approach

Abstract

Keywords

ASJC Scopus subject areas

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