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THE ENDOGENEITY OF INFORMATION ASYMMETRY AND CORPORATE FINANCING DECISIONS
Author(s) -
Ang James,
Cheng Yingmei
Publication year - 2011
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2011.01296.x
Subject(s) - endogeneity , information asymmetry , leverage (statistics) , equity (law) , business , monetary economics , corporate finance , external financing , finance , economics , econometrics , debt , machine learning , computer science , political science , law
Firms endogenize the extent of information asymmetry by choosing the optimal level and channels of direct communication with the capital markets. Firms choose more communication when they have a greater potential demand for external financing (characterized by higher growth, less cash, and higher leverage). We demonstrate that a higher level of communication is associated with a higher probability of equity issuance. We further document that the previously observed negative market reaction to seasoned equity offering (SEO) announcements is attributed only to low‐communication firms; high‐communication SEO firms experience no significant adverse market reaction.