College of Business Administration, Georgia State University, Atlanta. We acknowledge useful comments from René Stulz, the editor, an anonymous referee, and members of the Atlanta Finance Workshop, and the editorial assistance of Denise Noe. The second author is grateful to the Georgia State University College of Business Research Program Council for support. The first author has an appointment at the Research Division of the Federal Reserve Bank of Atlanta. Some of the work on this article was done while the second author was visiting the Federal Reserve Bank of Atlanta. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. The usual disclaimer applies.
Asymmetric Information, Managerial Opportunism, Financing, and Payout Policies
Article first published online: 30 APR 2012
1996 The American Finance Association
The Journal of Finance
Volume 51, Issue 2, pages 637–660, June 1996
How to Cite
NOE, T. H. and REBELLO, M. J. (1996), Asymmetric Information, Managerial Opportunism, Financing, and Payout Policies. The Journal of Finance, 51: 637–660. doi: 10.1111/j.1540-6261.1996.tb02697.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
We examine corporate issuance and payout policies in the presence of both adverse selection (in capital markets) and managerial opportunism. Our results establish the importance of the locus of decision control in the firm. When shareholders determine policies, debt financing is always optimal in the presence of either adverse selection or managerial opportunism. However, when both of these problems are simultaneously present, equity issuance can become an optimal signaling mechanism. Shareholders' most preferred signaling mechanism is restricting dividends, followed by equity financing, and finally underpricing securities. When managers determine policies, a reversed hierarchy may be obtained.