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Asymmetric Information, Managerial Opportunism, Financing, and Payout Policies
Author(s) -
NOE THOMAS H.,
REBELLO MICHAEL J.
Publication year - 1996
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.1540-6261.1996.tb02697.x
Subject(s) - opportunism , adverse selection , business , shareholder , information asymmetry , equity (law) , debt , finance , dividend , debt financing , corporate governance , monetary economics , economics , market economy , political science , law
We examine corporate issuance and payout policies in the presence of both adverse selection (in capital markets) and managerial opportunism. Our results establish the importance of the locus of decision control in the firm. When shareholders determine policies, debt financing is always optimal in the presence of either adverse selection or managerial opportunism. However, when both of these problems are simultaneously present, equity issuance can become an optimal signaling mechanism. Shareholders' most preferred signaling mechanism is restricting dividends, followed by equity financing, and finally underpricing securities. When managers determine policies, a reversed hierarchy may be obtained.