Christopher Hennessy from UC Berkeley is giving a VGSF research seminar on
"A dynamic theory of corporate finance based upon repeated signaling" on
FRIDAY, March 30th, from 15:30 to 17:00 in HS 7 at the BWZ, Brünnerstrasse
72, 1210 Wien. See the VGSF webpage (Activities & Events --> Research
Seminars) for a map of the location, the paper to download and this term's
entire schedule of seminars.
Please find the paper's abstract below. Christopher is going to be in Vienna
for the entire week (March 26th to March 30th). He would be very happy to
discuss research with the local faculty. Please contact Michael Halling if
you are interested and would like to take advantage of this opportunity.
Best,
Michael Halling
Abstract
We examine the effect of Markovian hidden information about the marginal
product of capital on the dynamics of financing and investment. The model
features endogenous investment, debt, default, dividends, equity flotations
and share repurchases. Since deadweight signaling costs are necessarily high
when net worth is low, forward-looking risk-neutral shareholders behave as
if risk-averse. Consequently, in each period's least-cost separating
equilibrium, firms can signal positive information with high leverage and
investment. Firms with negative information have no debt and raise external
funds with equity. Pareto dominant pooling equilibria also exist, but only
if net worth is sufficiently low. In the pooling equilibria, firms issue
positive amounts of debt and investment is between respective first-best
levels. The model is rich in testable predictions and consistent with a
broad set of established stylized facts regarding leverage ratios and
announcement effects, and can also explain observed violations of the
pecking-order hypothesis.