Stock Price Movements in Response to Stock Issues under Asymmetric Information

Authors

  • WILLIAM S. KRASKER

    Search for more papers by this author
    • Associate Professor, Graduate School of Business Administration, Harvard University. The author wishes to thank Paul Asquith and a referee for numerous suggestions that improved the exposition.

ABSTRACT

This paper characterizes the function relating the number of new shares issued by a firm to the resulting change in the firm's stock price, when insiders are asymmetrically informed. We show that, in equilibrium, the stock price will be a decreasing function of the issue size; moreover, the rate of decrease can be so rapid to cause “equity rationing.” We also show that there will be underinvestment relative to the symmetric information case.

Ancillary