Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers-Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.

Seminar paper from the year 2014 in the subject Economics - Finance, , course: MBA and Engineering, language: English, abstract: The specter of decreased economic activities, financial crisis, unbecoming ethical standards have in the recent past and fore going, characterized asymmetric information on corporate finance. The consequences normally have a ricochet effect and can be generally catastrophic to normal economic activities to mention the least. This paper considers scenario’s where information asymmetry was prevalent or may have had its effects play out. The typical investor mindset and the opportunity cost associated with the preferred capital structure of the capitalizing process were mentioned. A basis for proper appreciation of the concept – Corporate finance under asymmetric information was initiated here, with a detailed explanation of corporate finance and its components, this was succeeded by a summary of scenarios were asymmetric information were prevalent and an intelligent look was also taken at asymmetric information between insiders and investors and the concomitant lemon problem, where the effects were carefully highlighted in a progression to the level of severity - Market breakdown and costly signaling. The fact that asymmetric information has been widely recognized as bad and generally viewed in a negative light must warrant it being viewed with a high level of seriousness. It is widely known that while lot of effort have been put into stemming the tides of the consequences of asymmetric information, a lot of effort too, have been dedicated to innovation and risk assessment, to capture the interest of investors, who have been affected by the consequences of asymmetric information. These may have formed a veritable platform for a recent paper by Pierre Barbaroux (2014), that elucidated the rise of innovation and innovative entrepreneurs based on the management of asymmetric information. An attempt has in any case, been made here to suggest efforts at marginalizing the negative impacts of asymmetric information and also remedies at reducing the far reaching impacts on the lenders and the aggregate economic activity in general.

In this volume, specialists from traditionally separate areas in economics and finance investigate issues at the conjunction of their fields. They argue that financial decisions of the firm can affect real economic activity—and this is true for enough firms and consumers to have significant aggregate economic effects. They demonstrate that important differences—asymmetries—in access to information between "borrowers" and "lenders" ("insiders" and "outsiders") in financial transactions affect investment decisions of firms and the organization of financial markets. The original research emphasizes the role of information problems in explaining empirically important links between internal finance and investment, as well as their role in accounting for observed variations in mechanisms for corporate control.

The recent introduction of two European index options on the FTSE Eurotrack 100 and the Eurotop 100 is evidence of a demand from investors to hedge pan-European risk. The FTSE Eurotrack 100 was designed to closely resemble the longer established and widely quoted Morgan Stanley European index. The Eurotrack 100 covers a hundred companies in eleven countries in continental Europe. The index is denominated in DM and' a breakdown by value into the different countries covered is given in figure 1. Capitalisation weights for Figure 1 FT-SE Eurotrack 100 Index Norway mark Germany Italy Switzerland France Netherlands Another recently introduced European index is the Eurotop 100 index denominated in EeUs, this index contains twenty two UK companies which represent 27% by value of this index. The attraction of investments in these indices is that they provide a basis for weighted exposure to Europe, investors can then build on this 240 basis by investment in individual countries. The multinational context of the universe of shares defined by this index raises some new questions for the selection of portfolios, whether the portfolios are chosen for absolute performance or to track the index. Various possible objectives of portfolio selection will be discussed, in all cases the crucial role of the covariance matrix of returns is clear. The extra source of risk present in a multinational portfolio is the combination of country risk coupled with foreign exchange risk. Two models of the return covariance matrix are proposed and examined.

This paper assesses the impact of information asymmetries on developing country financing and considers alternative techniques to reduce the adverse implications of such asymmetries. Following an introduction, Section II examines in general terms the role of information in financial markets and analyzes the incentive and risk sharing properties of alternative financial contracts. Information asymmetries which are present in domestic finance are more prevalent in international finance, in particular in developing country financing. Section III reviews measures aiming to resolve information asymmetries. Borrowing and creditor country regulations and policies, as well as innovative contractual agreements help to resolve a range of issues related to information asymmetries. However, despite their contribution, residual problems remain unresolved. The international financial institutions, and in particular the Fund, have an important role to play in alleviating information asymmetries.