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Corporate financing and investment decisions when firms have information that investors do not have

Published on Jun 1, 1984in Journal of Financial Economics
· DOI :10.1016/0304-405X(84)90023-0
C MyersStewart41
Estimated H-index: 41
(MIT: Massachusetts Institute of Technology),
Nicholas S. Majluf4
Estimated H-index: 4
(UC: Pontifical Catholic University of Chile)
Sources
Abstract
This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions.The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities.The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.
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This paper is an empirical examination of the relation between firm value and two potential actions by entrepreneurs attempting to signal to investors information about otherwise unobservable firm features. The signals investigated are the proportion of equity ownership retained by entrepreneurs and the dividend policy of the firm; both signals are hypothesized to be positively related to firm value. Using a sample of unseasoned new equity issues, the empirical results are consistent with the en...
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