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Stock Price Movements in Response to Stock Issues under Asymmetric Information
Author(s) -
KRASKER WILLIAM S.
Publication year - 1986
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1986.tb04493.x
Subject(s) - stock price , stock (firearms) , equity (law) , economics , rationing , monetary economics , information asymmetry , financial economics , microeconomics , business , mechanical engineering , paleontology , health care , series (stratigraphy) , political science , law , engineering , biology , economic growth
This paper characterizes the function relating the number of new shares issued by a firm to the resulting change in the firm's stock price, when insiders are asymmetrically informed. We show that, in equilibrium, the stock price will be a decreasing function of the issue size; moreover, the rate of decrease can be so rapid to cause “equity rationing.” We also show that there will be underinvestment relative to the symmetric information case.