1Managerial FinanceLecture 16Risk ManagementRisk Management, Forwards and OptionsClass 15: Information Asymmetry•Think about the information advantagesof players and their potential responses:Any time someone with more information wants to sell youAny time someone with more information wants to sell you something, you should be skeptical: why are you the lucky buyer?•When managers have better information than investors:Equity issue is typically a bad signalWhy doesn’t debt (typically) have this problem? Because debt works like a warranty: debt is senior•Managers tend to issue equity:Whit ildtkidlitWhen it is overvalued: stock prices decline upon announcementsWhen information asymmetries are low: “hot” markets•Pecking order of financing1. Retained earnings2. Debt3. Equity2
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