Information_Asymmetry_and_the_Announcement_Effect_of_SEO

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1、InformationAsymmetryandtheAnnouncementEffectofSEOMyersandMajluf(1984)BasicSettings:Afirmhas“assetsinplace”(existingassets)att=0,whichwillpayoffcashflowatt=2.CashflowcanbeHigh(H)withprobabilityporLow(L)withprobability1–p.Att=1,firmwillhaveanewprojectthatreq

2、uiresinvestmentIandpayVatt=2.V>I.Managersactintheinterestofexistingshareholders.Att=0managersandthemarketknowonlythedistributionofthepayoffsofexistingassets.Att=1managersknowwhetherthepayoffistypeHortypeL.Att=1thenewprojectcanonlybefinancedwithequity.t=0t

3、=1t=2HAssetinPlaceCashFlowLInvestmentProject,IVANumericExample:H=100,L=50,p=0.1,I=20,V=30CandidateEquilibriumBelief1:Bothtypestaketheprojectandissueequity.Tonewshareholders:ifequityisissuedthefirmistypeHwithprobability0.1andLwithprobability0.9.Fairpricingcond

4、itionfornewequityholders:f:fractionofsharesissuedtonewequityholdersPayofftoexistingshareholdersaftertakingtheproject:TypeH:ManagersoftypeHfirmswillpassuptheproject,becausethepayofffromtakingtheproject,99.4islessthanthepayofffromnottakingit,100.TypeL:Managerso

5、ftypeLfirmswillissueequityandtaketheprojectbecausethepayofffromtakingtheproject,61.2ishigherthanthepayofffromnottakingit,50.ExternalFinancingasaProject:Equityfinancingitselfcouldbeviewedasaninvestmentproject.FortheexistingshareholdersofHtype,theequityissuedis

6、undervalued.IssuingequityisanegativeNPVproject(NPV=).Thelossinequityissuanceislargerthanthegainintakingthenewinvestmentproject(10).ThustypeHshareholderpassuptheproject.WhilefortypeLshareholderstheirequityissuedisovervalued.ThusissuingequityisapositiveNPVproje

7、ct(NPV=).Thebeliefcannotbesupportedintheequilibrium.CandidateEquilibriumBelief2:OnlyLtypetakestheprojectandissueequity.Tonewshareholders:ifequityisissued,thefirmistypeLwithprobability1.Fairpricingcondition:Payofftoshareholders:TypeH:ManagersoftypeHfirmswillpa

8、ssuptheproject.TypeL:ManagersoftypeLfirmswilltaketheprojectandissueequity.MarketValuebeforeandafterAnnouncementofEquityIssuanceBelief2issupportedintheequilibrium.Themarketvaluejustbeforet