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Stock Issues and Investment Policy When Firms Have Information That Investors Do Not Have

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  • Stewart C. Myers
  • Nicholas S. Majluf

Abstract

This paper describes corporate investment and financing decisions when managers have inside information about the value of the firm's existing investment and growth opportunities, but cannot convey that information to investors. Capital markets are otherwise perfect and efficient. In these circumstances, the firm may forego a valuable investment opportunity rather than issue stock to finance it. The decision to issue cannot fully convey the managers' special information. If stock is issued, stock price falls. Liquid assets or financial slack are valuable if they reduce the probability or extent of stock issues. The paper also suggests explanations for some aspects of dividend policy and choice of capital structure.

Suggested Citation

  • Stewart C. Myers & Nicholas S. Majluf, 1982. "Stock Issues and Investment Policy When Firms Have Information That Investors Do Not Have," NBER Working Papers 0884, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0884
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    References listed on IDEAS

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    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(4), pages 541-559.
    3. Campbell, Tim S., 1979. "Optimal Investment Financing Decisions and the Value of Confidentiality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(5), pages 913-924, December.
    4. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    5. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
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    Cited by:

    1. Gérard Charreaux, 2002. "Variation sur le thème:"À la recherche de nouvelles fondations pour la finance et la gouvernance d'entreprise"," Revue Finance Contrôle Stratégie, revues.org, vol. 5(3), pages 5-68, September.
    2. Ramesh K. S. Rao & Susan A. White, 1994. "The Dividend Payouts Of Private Firms: Evidence From Tax Court Decisions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(4), pages 449-464, December.

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