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- Title
Efficient Financing under Asymmetric Information.
- Authors
BRENNAN, MICHAEL; KRAUS, ALAN
- Abstract
This paper characterizes the conditions under which the adverse-selection problem, which may prevent a firm from issuing securities to finance an otherwise profitable investment, may be costlessly overcome by an appropriate choice of financing strategy. The conditions are specialized when the information asymmetry may be characterized by either a first-degree-stochastic-dominance or a mean-preserving-spread ordering across possible distributions of firm earnings. Possible financing strategies that resolve the information asymmetry are discussed, and the results are related to recent empirical findings concerning security issues.
- Subjects
CORPORATE finance; ADVERSE selection (Commerce); INFORMATION asymmetry; INVESTMENT analysis; FINANCIAL markets; RATE of return; SECURITIES trading; STRATEGIC planning; EARNINGS per share; INVESTMENT management; MARKET failure; SPREAD (Finance)
- Publication
Journal of Finance (Wiley-Blackwell), 1987, Vol 42, Issue 5, p1225
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1987.tb04363.x