Lect 16 221 web - Managerial Finance Lecture 16 Risk...

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1 Managerial Finance Lecture 16 Risk Management Risk Management, Forwards and Options Class 15: Information Asymmetry Think about the information advantages of players and their potential responses: Any time someone with more information wants to sell you Any 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 signal Why doesn’t debt (typically) have this problem? Because debt works like a warranty: debt is senior Managers tend to issue equity : Wh it i l d t k i d li t When it is overvalued: stock prices decline upon announcements When information asymmetries are low: “hot” markets Pecking order of financing 1. Retained earnings 2. Debt 3. Equity 2
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