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- Title
Learning in Financial Markets: Implications for Debt-Equity Conflicts.
- Authors
Davis, Jesse; Gondhi, Naveen
- Abstract
Financial markets reveal information that firm managers can utilize when making equity value-enhancing investment decisions. However, for firms with risky debt, such investments are not necessarily socially efficient. Despite this friction, we show that learning from prices improves investment efficiency. This effect is asymmetric, however, as investors learn less about projects that decrease the riskiness of cash flows: efficiency is lower for diversifying investments than for focusing (risk-increasing) investments. This also implies that investors' endogenous learning further attenuates risk shifting but amplifies debt overhang. Our model provides a novel channel through which learning from financial markets affects agency frictions between stakeholders.
- Subjects
FINANCIAL markets; INVESTMENTS; DECISION making in business; MARGINAL efficiency of investment; INVESTORS; LEARNING
- Publication
Review of Financial Studies, 2024, Vol 37, Issue 5, p1584
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhad083