Working Paper: NBER ID: w1396
Authors: Stewart C. Myers; Nicholas S. Majluf
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.
Keywords: Corporate Finance; Asymmetric Information; Investment Decisions
JEL Codes: G32; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| management's information advantage (D83) | decision not to issue shares (G24) |
| decision not to issue shares (G24) | firm value (G32) |
| decision not to issue shares (G24) | investment allocation (G11) |
| refusal to issue stock (G24) | market value (D46) |
| financial slack (G53) | investment decisions (G11) |
| decision not to issue stock (G24) | stock price (G12) |