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Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions

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  • Talmor, Eli

Abstract

As is shown in the financial literature, the assumption of perfect and costless information often leads to the conclusion that corporate financial decisions are inconsequential to the value of the firm (e.g., Stiglitz [20] and Fama [6]). This conclusion seems to be in direct contradiction with the observed behavior of corporations that allocate real resources to implement financial policies. The gap between theory and observed behavior is bridged by introducing various frictions and market imperfections. A growing number of studies examine the optiraality of financial decisions when the assumption of perfect and costless information is replaced by allowing for informational asymmetry. The asymmetry is assumed to exist between corporate insiders who possess superior information about the firm's future earnings prospects and outside investors. The emphasis in this literature is on the ability of financial instruments to serve as signaling devices through which the true value of the firm can be revealed to the market without moral hazard or disclosure of confidential information. Although the signaling process is typically considered to be costly, it is advocated that firms may be better off if they employ this mechanism rather than reveal reliable, but confidential information, or not disclose at all.

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  • Talmor, Eli, 1981. "Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 413-435, November.
    • Handle: RePEc:cup:jfinqa:v:16:y:1981:i:04:p:413-435_00
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    Cited by:

    1. Kwang Soo Cheong, 1998. "Corporate Income Taxation and Signaling," Public Finance Review, , vol. 26(5), pages 480-502, September.
    2. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    3. Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    4. Eleni Gkeka & Kosmas Kosmidis & Georgios Simitsis, 2018. "The value relevance of dividend announcement: An empirical study of the Greek Stock Market," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 11(2), pages 44-50, September.
    5. Zhao, Jianmei & Katchova, Ani L. & Barry, Peter J., 2004. "Testing The Pecking Order Theory And The Signaling Theory For Farm Businesses," 2004 Annual meeting, August 1-4, Denver, CO 20215, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Lee, Wayne L & Thakor, Anjan V & Vora, Gautam, 1983. "Screening, Market Signalling, and Capital Structure Theory," Journal of Finance, American Finance Association, vol. 38(5), pages 1507-1518, December.
    7. Yung-Chuan Lee & Ming-Chang Wang, 2014. "Does the Appointment of Independent Directors Drive Multiple Effects?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(1), pages 69-88.
    8. Ahmad Ahmadpour & Mahmoud yahyazadefar & Babak Garmroudi, 2006. "The Influence of Agency Costs on Dividend Policy in an Emerging Market: “Evidence from the Tehran Stock Exchange”," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 11(1), pages 59-80, winter.

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