asymmetric information

Examples of asymmetric information in the following topics:

• Pecking Order

  • In corporate finance pecking ordering consideration takes into account the increase in the cost of financing with asymmetric information.
  • Pecking order theory basically states that the cost of financing increases with asymmetric information.
  • Goyal and Frank show, among other things, that Pecking Order theory fails where it should hold, namely for small firms where information asymmetry is presumably an important problem.

• Signaling Consideration

  • Signaling is the conveyance of nonpublic information through public action, and is often used as a technique in capital structure decisions.
  • In economics and finance, signaling is the idea that a party may indirectly convey information about itself, which may not be public, through actions to other parties.
  • Signaling becomes important in a state of asymmetric information (a deviation from perfect information), which says that in some economic transactions inequalities in access to information upset the normal market for the exchange of goods and services.
  • In his seminal 1973 article, Michael Spence proposed that two parties could get around the problem of asymmetric information by having one party send a signal that would reveal some piece of relevant information to the other party.
  • In terms of capital structure, management should, and typically does, have more information than an investor, which implies asymmetric information.

• Signaling

  • A dividend decision may have an information signalling effect that firms will consider in formulating their policy.
  • Signaling took root in the idea of asymmetric information, which says that in some economic transactions, inequalities in access to information upset the normal market for the exchange of goods and services .
  • When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information in actions like the firm's dividend policy.
  • Miller and Rock pointed out that this is likely due to the information content of dividends.
  • Describe what information a shareholder can obtain from a company issuing dividends

• Managers, Shareholders, and Bondholders

  • These three parties have different interests and asymmetric information, such that the principals cannot directly ensure that the agents are always acting in its (the principals') best interests.

• Defining Agency Conflicts

  • The two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agents are always acting in its (the principals') best interests, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe.

• Leverage Models

  • The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information - and in an efficient market - the value of a firm is unaffected by how that firm is financed.

• Capital Structure Overview and Theory

  • Pecking Order Theory tries to capture the costs of asymmetric information.

• Approaches to Assessing Risk

  • The field of behavioral finance focuses on human risk-aversion, asymmetric regret, and other ways that human financial behavior varies from what analysts call "rational".

• Information Costs and Bond Prices

  • If investors need time and money to acquire information on securities, then they pay a greater information cost.
  • We can use the demand and supply analysis to create two markets for the high and low information- cost bond markets.
  • Investors pay a greater cost to acquire information for the high information cost bonds.
  • Thus, investors are attracted to the low-information cost bonds, boosting their demand for low information cost bonds, increasing the market price and decreasing market interest rate.
  • Therefore, low-information-cost bonds pay a lower interest rate.

• Role of Financial Markets in Providing Feedback to Management

  • Management often has imperfect information about its own business, especially its business' value in the outside world .
  • For example, investors who hold shares in multiple firms in a sector may have more information about the prospects in that sector than the manager of one firm in that sector.
  • In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other, creating an imbalance of power.
  • Financial economists have applied information asymmetry in studies of differentially informed financial market participants (insiders, stock analysts, investors, among others).