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

46 Pages Posted: 13 Nov 2007 Last revised: 4 Dec 2022

See all articles by Stewart C. Myers

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Nicholas J Majluf

affiliation not provided to SSRN

Date Written: April 1982

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

Myers, Stewart C. and Majluf, Nicholas J, Stock Issues and Investment Policy When Firms Have Information that Investors Do Not Have (April 1982). NBER Working Paper No. w0884, Available at SSRN: https://ssrn.com/abstract=351410

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
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National Bureau of Economic Research (NBER)

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Nicholas J Majluf

affiliation not provided to SSRN