Multi-stage investment, long-term asymmetric information and equity issues

Miglo, Anton (2012): Multi-stage investment, long-term asymmetric information and equity issues. Published in: Journal of Current Issues in Finance, Business and Economics , Vol. 4, No. 4 (2012): pp. 331-348.

Abstract

We analyze equity financing for a two-stage investment and consider different informational structures. When private information is short-term, equilibria are consistent with signalling theory and pecking-order theory. When private information is long-term, equilibria may exist where high quality firms issue equity. The model explains the link between debt-equity choice and subsequent performance after issue (short-term versus long-term). A set of new predictions is generated regarding the link between the extent of asymmetric information and equity issues, macroeconomic performance and equity issues and market timing.

• Item Type: MPRA Paper
• Language: English
• Keywords: equity issues, long-term asymmetric information, multi-stage investment, pecking-order theory, signalling
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Antweiler, Werner, and Murray Z. Frank, 2006, Do U.S. Stock Markets Typically Overreact to Corporate News Stories? Working Paper, University of British Columbia and University of Minnesota.

Baker Kent H., Gary E. Powell, and E. Theodore Veit, 2003, Why Companies Use Open-Market Repurchases: A Managerial Perspective, Quarterly Review of Economics and Finance 43, 483-504.

Baker, Malcolm, and Jeffrey Wurgler, 2002, Market Timing and Capital Structure, Journal of Finance 57, 1-32. Bayless, Mark, and Susan Chaplinsky, 1996, Is There a Window of Opportunity for Seasoned Equity Issuance? Journal of Finance 51, 253-278.

Berkovitch, E., Narayanan, M., 1993, Timing of Investment and Financing Decisions in Imperfectly Competitive Financial Markets, Journal of Business 66, 219-248.

Bharath, Sreedhar, Paolo Pasquariello, and Guojun Wu, 2008, Does Asymmetric Information Drive Capital Structure Decisions? Review of Financial Studies 22, 3211-3243.

Billett, M., Flannery , M., Garfinkel, G., 2007, Long-Run Underperformance Following External Finance Issues? SSRN working paper.

Brennan, Michael, and Alan Kraus, 1987, Efficient Financing under Information Asymmetry, Journal of Finance 42, 1225-1243.

Brick, Ivan E., Michael Frierman, and Yu K. Kim, 1998, Asymmetric Information Concerning the Variance of Cash Flows: The Capital Structure Choice, International Economic Review 39, 745-761.

Butler Alexander W., Gustavo Grullon, and James P. Weston, 2005, Can Managers Forecast Aggregate Market Returns? Journal of Finance 60, 963-986.

Cai, J., and T. Loughran, 1998, The Performance of Japanese Seasoned Equity Offerings, 1971-1992, Pacific-Basin Finance Journal 6, 395-426.

Carter, Richard B., Dark, Rick H. and Sapp, Travis, 2009, Characterizing the Risk of IPO Long-Run Returns: The Impact of Momentum, Liquidity, Skewness, and Investment” SSRN working paper.

Chen, H., Chen, L., Ho, K., 2007, Do IPO Underwriting Relationship Affect the Subsequent Lending Business? FMA 2007 Orlando.

Chen , L., and X. Zhao, 2004, The Modified Pecking Order Theory: New Empirical Evidence From Corporate Financing Decisions, Michigan University Working Paper.

Chichti, J., and K. Bougatef, 2010, Equity Mmarket Ttiming and Ccapital Sstructure: Evidence from Tunisia and France, Working paper. Available at http://www.tn.refer.org/CEAFE/Papiers_CEAFE10/Fina_marche/Bougatef.pdf.

Chirinko, Robert, and Anuja Singha, 2000, Testing Static Trade-off against Pecking Order Models of Capital Structure: A Critical Comment, Journal of Financial Economics 58, 417-425.

Choe, Hyuk, Ronald Masulis, and Vicram Nanda, 1993, Common Stock Offerings Across the Business Cycle, Journal of Empirical Finance 1, 1-29.

Cooney, J., Kalay, A, 1993, Positive Information from Equity Issue Announcements, Journal of Financial Economics 33, 149-172.

Daniel, K., and S. Titman, 1995, Financing Investment under Asymmetric Information. In R. Jarrow, V. Maksimovic and V. Ziemba. Handbooks In OR and MS, Vol. 9, Elseveir, pp. 721-766.

David, F. Strategic Management: Concepts and Cases. Pearson Education 2006.

Degeorge, F., Patel, J., and Zeckhauser, R., 1999, Earnings Management to Exceed Thresholds, Journal of Business 72, 1-33.

D’Mello, Ranjan, and Stephen P. Ferris, 2000, The Information Effects of Analyst Activity at the Announcement of New Equity Issues, Financial Management 29, 78-95.

DuCharme, L., P. H. Malatesta, and S. Sefcik, 2004, Earnings Management, Stock Issues, and Shareholder Lawsuits, Journal of Financial Economics 71, 27-49.

Dybvig, Philip H & Zender, Jaime F, 1991, Capital Structure and Dividend Irrelevance with Asymmetric Information, Review of Financial Studies 4, 201-19

Eckbo, B. Espen, 1986, Valuation Effects of Corporate Debt Offerings, Journal of Financial Economics 15, 119-151.

Eckbo, B. Espen, Ronald Masulis, and Oyvind Norli, 2007, Security Offerings, In B. Espen Eckbo, (ed.) Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 1., 233-373 Amsterdam: Elsevier/North-Holland.

Fama, Eugene, and Kennett R. French, 2002, Testing Trade-off and Pecking Order Predictions about Dividends and Debt, Review of Financial Studies 15, 1-33.

Frank, Murray and Vidhan Goyal, 2003, Testing the Pecking Order Theory of Capital Structure, Journal of Financial Economics 67, 217-248.

Frank, Murray, and Vidhan Goyal, 2007, Capital Structure Decisions: Which Factors Are Reliably Important? Working Paper, University of Minnesota and Hong Kong University of science and Technology.

Fulghieri, Paolo, and Dmitry Lukin, 2001, Information Production, Dilution Costs, and Optimal Security Design, Journal of Financial Economics 61, 3-42.

Galpin, N. 2004, Can the Pecking Order Explain the Costs of Raising Capital? Indiana University Working Paper.

Giammarino, R., and E. Neave, 1982, The Failure of Financial Contracts and the Relevance of Financial Policy, Queen's University, School of Business, Working paper #82-3.

Goswami, G., Noe, T., Rebello, M., 1995, Debt Financing under Asymmetric information, Journal of Finance 50, 633-659.

Graham, John R., and Campbell R. Harvey, 2001, The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics 60, 187-243.

Halov Nikolay, 2006, Dynamics of Asymmetric Information and Capital Structure, Working Paper, New York University.

Hansen, Robert S., and Atulya Sarin, 1998, Are Analysts Over-Optimistic Around Seasoned Equity Offerings, Working Paper, Tulane University.

Harris, Milton, and Artur Raviv, 1991, The Theory of Capital Structure, Journal of Finance 46, 297-356.

Heinkel, R, 1982, A Theory of Capital Strcuture Relevance Under Imperfect Information, Journal of Finance 37, 1141-1150.

Hennessy, Christopher, Dmitry Livdan, and Bruno Miranda, 2010, Repeated Signaling and Firm Dynamics Signal, Review of Financial Studies 23, 1981-2023.

Hennessy, Christopher A., and Tony A. Whited, 2005, Debt Dynamics, Journal of Finance 60, 1129-1165.

Jain, Bharat, and Omesh Kini, 1994, The Post-Issue Operating Performance of IPO Firms.” Journal of Finance 49:5, 1699-1726.

Jensen, Michael C, 1986, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review 76, 323-329.

Jensen, Michael C., and William H. Meckling, 1976, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics 3, 305-360.

Kamath, Ravindra, 1997, Long-term Financing Decisions: Views and Practices of Financial Managers of NYSE Firms, Financial Review 32, 331-356.

Knill, April M., and Lee, Bong-Soo, 2006, Market Timing or Pseudo-Market Timing: An International Examination, Working Paper, Social Science Research Network.

Korajczyk, Robert A., Deborah Lucas, and Robert McDonald, 1990, Understanding Stock Price Behavior around the Time of Equity Issues.” In R. Glenn Hubbard, (ed.), Asymmetric Information, Corporate Finance, and Investment, Chicago: University of Chicago Press), p. 257-278.

Korajczyk, Robert A. Deborah Lucas, and Robert McDonald, 1992, Equity Issues with Time-Varying Asymmetric Information, Journal of Financial and Quantitative Analysis 27, 397-417.

Leary, Mark T., and Michael R. Roberts, 2010, The Pecking Order, Debt Capacity, and Information Asymmetry, Journal of Financial Economics 95, 332-355.

Leland, Hayne E., and David H. Pyle, 1977, Information Asymmetries, Financial Structure, and Financial Intermediation, Journal of Finance 32, 371-378.

Lemmon, Michael L., and Jame F. Zender. (forthcoming). Debt Capacity and Tests of Capital Structure Theories. Journal of Financial and Quantitative Analysis.

Loughran, Tim, and Jay R. Ritter, 1995, The New Issues Puzzle, Journal of Finance 50, 23-51.

Loughran, Tim, and Jay R. Ritter, 1997, The Operating Performance of Firms Conducting Seasoned Equity Offerings, Journal of Finance 52, 1823-1850.

Lucas, Deborah, and Robert McDonald, 1990, Equity Issues and Stock Price Dynamics, Journal of Finance 45, 1019-1043.

Malmendier, Ulrike, Geoffrey A. Tate, and Jun Yan, 2005, Corporate Financial Policies with Overconfident Managers, Working Paper, Stanford University and University of Pennsylvania.

Masulis, Ronald W, 1980, The Effects of Capital Structure Change on Security Prices: A Study of Exchange Offers, Journal of Financial Economics 8, 139-177.

Masulis, Ronald, and Ashok Korwar, 1986, Seasoned Equity Offerings: An Empirical Investigation, Journal of Financial Economics 15, 91-118.

Miglo, Anton 2010, Capital Structure and Earnings Manipulation, Journal of Economics and Business (forthcoming).

Mikkelson, Wayne H., M. Megan Partch, and Kshitij Shah, 1997, Ownership and Operating Performance of Companies that Go Public, Journal of Financial Economics 44, 281-307.

Modigliani, Franco, and Miller H. Miller, 1958, The Cost of Capital, Corporate Finance and the Theory of Investment, American Economic Review 48, 261-297.

Mohamed, E., and T. Eldomiaty, 2009, Is Debt Governance Structure Relevant to Firm Operating Performance in Egypt? A Dynamic Approach, International Journal of Accounting and Finance 1, 216-249.

Myers, Stewart C., and Nicolas S. Majluf, 1984, Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have, Journal of Financial Economics 13, 187-221.

Noe, Thomas H., 1988, Capital Structure and Signaling Game Equilibria, Review of Financial Studies 1, 331-355.

Noe, Thomas H., and Michael J. Rebello, 1996, Asymmetric Information, Managerial Opportunism, Financing, and Payout Policies, Journal of Finance 51, 637-660.

Pagano, M., F. Panetta, and L. Zingales, 1998, Why Do Companies Go Public? An Empirical Analysis, Journal of Finance 53, 27-64.

Rajan, Raghuram, and Luigi Zingales, 1995, What Do We Know about Capital Structure: Some Evidence from International Data, Journal of Finance 50, 1421-1460.

Ritter, Jay R., and Ivo Welch, 2002, A Review of IPO Activity, Pricing, and Allocations, Journal of Finance 57, 1795-1828.

Ross, Stephen A., 1977, The Determination of Financial Structure: The Incentive Signaling Approach, Bell Journal of Economics 8, 23-40.

Schultz Paul H., 2003, Pseudo Market Timing and the Long-Run Performance of IPOs, Journal of Finance 58, 347-381.

Shah, Kshitij, 1994, The Nature of Information Conveyed by Pure Capital Structure Changes, Journal of Financial Economics 36, 89-126.

Shyam-Sunder, Lakshmi, and Stewart C. Myers, 1999, Testing Static Tradeoff against Pecking Order Models of Capital Structure, Journal of Financial Economics 51, 219-244.

Teoh, Siew H., Ivo Welch, and T. J. Wong, 1998, Earnings Management and the Underperformance of Seasoned Equity Offerings, Journal of Financial Economics 50, 63-99.

Titman, Sheridan, and Roberto Wessels, 1988, The Determinants of Capital Structure Choice, Journal of Finance 43, 1-21.

Viswanath, P.V., 1993, Strategic Considerations, the Pecking Order Hypothesis, and Market Reactions to Equity Financing, Journal of Financial and Quantitative Analysis 28, 213-234

Zwiebel, J. 1996, Dynamic Capital Structure under Managerial Entrenchment, American Economic Review 86, 1197-1215.