Two essays on Information Asymmetry
Date Issued
2007
Date
2007
Author(s)
Liang, Woan-lih
DOI
en-US
Abstract
This doctoral thesis explores (1) “Convertible Securities as a Truth Telling Mechanism in Venture Financing” and (2) “The Size of an Initial Shareholding and the Precision of Investor Information in Conditions of Noisy Rational Expectation Equilibrium”.
The first essay of this dissertation provides a rationale for adopting convertible securities as a means of venture financing in terms of dealing with information asymmetry. We posit that the issues of entrepreneur’s incentive to manipulate earnings may be compounded with double moral hazard problems when the efforts of both external investor and entrepreneur are unobservable. We also demonstrate that convertible securities provide the investor with the flexibility to adjust the proportion of shareholdings and debt-like claims and thus serve as an effective truth-telling mechanism.
The second essay of this dissertation articulates and investigates a situation in which the precision of an inside investor’s private signal increases with the proportion of total shares held. Intuitively, an insider with a more informative signal regarding the prospect of the project may be expected to involve himself in larger information-motivated transactions and enjoy greater abnormal profits. We suggest that such an advantage, nevertheless, may be alleviated or even eliminated when the financial statements accompanied by disclosure of either his shareholdings or the distribution of block shareholdings reveal the extent to which the insider is informed. The market may optimize its reaction to the order flows accordingly.
Subjects
可轉換證券
逆選擇
雙重道德危險
訊息精度
內部人交易
Convertible security
Adverse selection
Double moral hazard
Information Precision
Insider Trading.
Type
thesis
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