Working Paper: NBER ID: w0884
Authors: Stewart C. Myers; Nicholas S. Majluf
Abstract: This paper describes corporate investment and financing decisions when managers have inside information about the value of the firm's existing investment and growth opportunities, but cannot convey that information to investors. Capital markets are otherwise perfect and efficient. In these circumstances, the firm may forego a valuable investment opportunity rather than issue stock to finance it. The decision to issue cannot fully convey the managers' special information. If stock is issued, stock price falls. Liquid assets or financial slack are valuable if they reduce the probability or extent of stock issues. The paper also suggests explanations for some aspects of dividend policy and choice of capital structure.
Keywords: information asymmetry; corporate finance; stock issuance; investment decisions; managerial information
JEL Codes: G30; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| availability of inside information (G14) | decision to issue stock (G24) |
| decision to issue stock (G24) | forego investment opportunities (G31) |
| availability of inside information (G14) | forego investment opportunities (G31) |
| expected market reaction (G17) | decision to issue stock (G24) |