https://www.nber.org/system/files/working_papers/w1396/w1396.pdf

Corporate financing and investment decisions when firms have information that investors do not have

The investment opportunity set and corporate financing, dividend, and compensation policies☆

This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions.The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities.The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w1396.pdf?abstractid=274547&rulid=5070249&mirid=4

Corporate Financing and Investment Decisions When Firms Have Informationthat Investors Do Not Have

We extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the firm's managers to know more than outside investors about the true state of the firm's current earnings. The extension endogenizes the dividend (and financing) announcement effects amply documented in recent research. But once trading of shares is admitted to the model along with asymmetric information, the familiar Fisherian criterion for optimal investment becomes time inconsistent: the market's belief that the firm is following the Fisher rule creates incentives to violate the rule.

We show that an informationally consistent signalling equilibrium exists under asymmetric information and the trading of shares that restores the time consistency of investment policy, but leads in general to lower levels of investment than the optimum achievable under full information and/or no trading. Contractual provisions that change the information asymmetry or the possibility of profiting from it could eliminate both the time inconsistency and the inefficiency in investment policies, but these contractual provisions too are likely to involve dead-weight costs. Establishing which route or combination of routes serves in practice to maintain consistency remains for future research.

/pdf/dividend-policy-under-asymmetric-information-24ac7g0kqa.pdf

Dividend Policy under Asymmetric Information

The economic literature about dividends usually assumes that managers are perfect agents of investors, and it seeks to determine why these agents pay dividends. Other literature about the firm assumes that managers are imperfect agents and inquires how managers' interests may be aligned with shareholders' interests. These two lines of inquiry rarely meet.' Yet logically any dividend policy (or any other corporate policy) should be designed to minimize the sum of capital, agency, and taxation costs. The purpose of this paper is to ask whether dividends are a method of aligning managers' interests with those of investors. It offers agency-cost explanations of dividends.

https://ecsocman.hse.ru/data/803/126/1231/easterbrook_-_agencyx26dividends_1984.pdf

Two Agency-Cost Explanations of Dividends

This paper assumes that outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that under these conditions, such dividends function as a signal of expected cash flows. By structuring the model so that finite-lived investors turn over continuing projects to succeeding generations of investors, we derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.

https://ecsocman.hse.ru/data/907/126/1231/Bhattacharya_-_assymetry_1979.pdf

Sudipto Bhattacharya

Papers

Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy