7- 1 econ 4560, anton miglo lecture 7: asymmetric information and signalling with capital structure...
Post on 17-Dec-2015
222 Views
Preview:
TRANSCRIPT
7- 1
ECON 4560, Anton Miglo
Lecture 7: Asymmetric information
and signalling with capital structure choice
Anton Miglo
Fall 2008
7- 2
ECON 4560, Anton Miglo
Topics
Insiders and outsiders Information manipulations and credible
signalling Pecking-order theory Signalling by “risk-bearing” Additional readings: GT ch. 19
7- 3
ECON 4560, Anton Miglo
Insiders and Outsiders
7- 4
ECON 4560, Anton Miglo
Asymmetric Information Problem
7- 5
ECON 4560, Anton Miglo
Information Disclosing and Information Manipulation
7- 6
ECON 4560, Anton Miglo
Adverse Selection: Market for Lemons
7- 7
ECON 4560, Anton Miglo
ExampleTwo periods. The firm will operate only once in period 2 and then be liquidated.
There is no discounting.
There exist 12 million shares outstanding.
The firm has assets worth $100 million in period 1 and needs to raise $70 million for a project, which will pay $90 million.
The cash flow of the firm in period 2 is $190 if the investment is made, and $100 if it is not.
If the entrepreneur had enough money to pay for the new project he would have done so.
Using equity will be problematic if there is asymmetric information about the real value of assets in place and the value of the new project.
7- 8
ECON 4560, Anton Miglo
General ModelTwo periods. The firm will operate only once in period 2 and then be liquidated. There is no discounting.
The firm has assets X in period 1 and needs to raise B for a project which will pay R>B.
The cash flow of the firm in period 2 is X+R if the investment is made, and X if it is not.
If the entrepreneur had enough money to finance the project, he would have done so.
He could issue debt. Since R>B the debt would be risk free. Outside investors would have no problem buying the debt and nothing would be learned about X, but it would not matter. (the same as inside financing)
Using equity will be problematic if there is asymmetric information about X.
7- 9
ECON 4560, Anton Miglo
Pecking-order Theory
7- 10
ECON 4560, Anton Miglo
Signalling by “risk-bearing”
7- 11
ECON 4560, Anton Miglo
Signalling by “risk-bearing”• project net return R=N(θ,σ²); ∙ • θ is the entrepreneur's private information;• investors are risk neutral;• The entrepreneurs’ expected utility: Eu(w)=Ew-1/2ρσ²w.• two types of firms (equally probable)
Expected profit
Variance
Type 1 100 100
Type 2 200 100
7- 12
ECON 4560, Anton Miglo
Patterns of Corporate Financing
7- 13
ECON 4560, Anton Miglo
Debt Ratios for some IndustriesIndustry Debt to Value Ratio Internet .0218Educational Services .0224Drugs&Cosmetics .0907Instruments .1119 Metal Mining .1347Electronics .1579Machinery .1957Food .2056Construction .2384Petroleum Refining .2436Chemicals .2544Apparel .2603 Motor Vehicles Parts .2714Paper .2895 Textile Mill Products .3257Retail Dept Stores .3433 Trucking* .3730 Steel .3819Telephone* .5150 Elec. & Gas Utilities* .5309 Airlines* .5825
7- 14
ECON 4560, Anton Miglo
Implications
a See Leland and Pyle (1997) and Myers and Majluf (1984).
bSee Miller and Rock (1985).
cSee Ross (1977)
7- 15
ECON 4560, Anton Miglo
Stock Market Response to Pure Capital Structure Changes
Security Issued
Security Retired
Two-Day Announcement Period
Return
Leverage Increased
Stock Repurchase Debt Common 21.9%
Exchange offer Debt Common 14.0%
Exchange offer Preferred Common 8.3%
Leverage reduced
Exchange offer Common Debt -9.9%
Security Sales Common Debt -4.2%
Conversion-forcing call Common Convertible -0.4%
Conversion-forcing call Common Preferred -2.1%
top related