Asymmetric information about both private valuations of assets and their quality gives rise to uncertainty over sellers’ motives of trade, allowing high-valuation holders of low-quality assets to ...engage in speculative trades that involve no allocative gains. When sellers compete to find buyers, such speculative behaviour not only dilutes the average quality of assets but also creates a welfare-detrimental congestion externality that lengthens the time on market for each individual seller. A market designer can mitigate the inefficiencies by imposing a transaction tax and, in the case of severe adverse selection, limiting market participation.
•Asymmetric information about asset valuation and quality allows speculative trading.•In search markets, speculative trading can create a congestion externality.•A congestion externality can be mitigated by imposing a transaction tax.
Information asymmetry is a condition wherein one party in a relationship has more or better information than another. The information asymmetry concept is widely diffused throughout management ...research, and its existence is a core assumption within leading theories on organizations. Despite information asymmetry’s central role, however, there have been no systematic reviews of the management literature using the concept. As a result, there is no established level of knowledge of information asymmetry as a management concept, nor is there a unified basis for directing future research leveraging the concept. In response, we review 223 relevant articles from leading management journals and develop a framework for organizing and assessing information asymmetry research. We consolidate understanding of information asymmetry’s meaning, conceptual applications, roles in different theoretical models, antecedents, and how focal actors’ self-interests influence the selection of mechanisms for managing it. Further, we highlight opportunities for extensions to core management theories and specify research prospects within several management subfields. Overall, the framework can help guide researchers as they work to advance understanding of one of the management field’s most ubiquitous concepts.
•This paper presents a new explanation for the prevalence of convertible securities in venture capital finance.•We demonstrate that convertible securities can result in the optimal contract.•Our ...theoretical findings provide some testable predictions.•Specifically, the optimal conversion ratio rises when the information asymmetry problem worsens.•We also reveal that the conversion ratio becomes smaller during economic booms since the adverse selection problem is less relevant.
This paper presents a new explanation for the prevalence of convertible securities in venture capital finance. Modeling two-sided asymmetric information between an entrepreneur and a venture capitalist, we demonstrate that convertible securities can result in the optimal contract. Our theoretical findings also provide some testable predictions. Specifically, the optimal conversion ratio rises when the information asymmetry problem worsens. We also reveal that the conversion ratio becomes smaller during economic booms since the adverse selection problem is less relevant.
Government subsidies for R&D are intended to promote projects with high returns to society but too little private returns to be beneficial for private investors. This may be caused by spillovers or a ...low appropriability rate. Apart from the direct funding of these projects, government grants may serve as a signal for good investments for private investors. We use a simple signaling model with different types of R&D projects to capture this phenomenon. The agency has a preference for basic research projects as they promise high expected social returns, while banks prefer applied research projects with high private returns. In a setup where the subsidy can only be used to distinguish between basic and applied research projects, government agency’s signal is not very helpful for banks. However, if the subsidy is accompanied by a quality signal, it can lead to increased or better selected private investments.
We quantify the empirical relevance of the pecking order hypothesis using a novel empirical model and testing strategy that addresses statistical power concerns with previous tests. While the ...classificatory ability of the pecking order varies significantly depending on whether one interprets the hypothesis in a strict or liberal (e.g., “modified” pecking order) manner, the pecking order is never able to accurately classify more than half of the observed financing decisions. However, when we expand the model to incorporate factors typically attributed to alternative theories, the predictive accuracy of the model increases dramatically—accurately classifying over 80% of the observed debt and equity issuances. Finally, we show that what little pecking order behavior can be found in the data is driven more by incentive conflicts, as opposed to information asymmetry.
We study the effect of antitakeover provisions (ATPs) on innovation. To establish causality, we use a regression discontinuity approach that relies on locally exogenous variation generated by ...shareholder proposal votes. We find a positive, causal effect of ATPs on innovation. This positive effect is more pronounced in firms that are subject to a larger degree of information asymmetry and operate in more competitive product markets. The evidence suggests that ATPs help nurture innovation by insulating managers from short-term pressures arising from equity markets. Finally, the number of ATPs contributes positively to firm value for firms involved in intensive innovation activities.
In this study, we examine the empirical association between corporate social responsibility (CSR) and information asymmetry by investigating their simultaneous and endogenous effects. Employing an ...extensive U.S. sample, we find an inverse association between CSR engagement and the proxies of information asymmetry after controlling for various firm characteristics. The results hold using 2SLS considering the reverse side of information asymmetry influencing CSR activities. The results also hold after mitigating endogeneity based on the dynamic panel system generalized method of moment. Furthermore, the CSR-information asymmetry relation is amplified in high-risk firms due to managers' efforts to build a good reputation. Last, we find that CSR engagement is inversely associated with reputational risk measure and lower predicted value of reputational risk is positively associated with lower information asymmetry measures. We interpret these results as supporting the stakeholder theory-based, reputation-building explanation that considers CSR engagement as a vehicle to build and maintain firm reputation thereby enhancing the information environment.
We investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to ...(1) reduced agency costs due to enhanced stakeholder engagement and (2) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. We provide evidence that both better stakeholder engagement and transparency around CSR performance are important in reducing capital constraints. The results are further confirmed using several alternative measures of capital constraints, a paired analysis based on a ratings shock to CSR performance, an instrumental variables approach, and a simulataneous equations approach. Finally, we show that the relation is driven by both the social and environmental dimension of CSR.
In the context of team production, this paper studies the optimal (deterministic and stochastic) information allocation that implements desired effort levels as the unique Bayesian equilibrium. We ...show that under certain conditions, it is optimal to asymmetrically inform agents even though they may be ex ante symmetric. The main intuition is that informing the agents asymmetrically can be effective in avoiding “bad” equilibria, that is, equilibria with coordination failure.
We find that a substantial portion of short sellers' trading advantage comes from their ability to analyze publicly available information. Using a database of short sales combined with a database of ...news releases, we show that the well-documented negative relation between short sales and future returns is twice as large on news days and four times as large on days with negative news. Further, we find that the most informed short sales are not from market makers but rather from clients, and we find only weak evidence that short sellers anticipate news events. Overall, the evidence suggests that public news provides valuable trading opportunities for short sellers who are skilled information processors. PUBLICATION ABSTRACT
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