How Entrepreneurs Mitigate the Investor's Adverse Selection Problem: New Evidence from Private Firm Sales

2018 ◽  
Author(s):  
Rachel M. Hayes ◽  
Mark Jansen
Keyword(s):  
Adverse Selection ◽  
Private Firm ◽  
Selection Problem ◽  
Adverse Selection Problem ◽  
New Evidence

Research of Construction Enterprises Adverse Selection Based on the Signaling Model

2013 ◽  
Vol 357-360 ◽  
pp. 2692-2695
Author(s):  
Wang Ying ◽  
Hui Jia
Keyword(s):  
Real Estate ◽  
Adverse Selection ◽  
Selection Problem ◽  
Signaling Model ◽  
Construction Enterprises ◽  
Selection Behavior ◽  
Real Estate Projects ◽  
Adverse Selection Problem

To select construction enterprises is very important for real estate projects, and it plays a key role in the success or failure of the programmed. In order to reduce the situation of construction enterprises adverse selection behavior, this paper studies the development enterprise in the process of the construction enterprises to select the root causes and effects of adverse selection problem and establishes the signaling model to analyze deeply on this issue.

The Pecking Order Theory of Capital Structure

2020 ◽  
Author(s):  
Murray Z. Frank ◽  
Vidhan Goyal ◽  
Tao Shen
Keyword(s):  
Capital Structure ◽  
Adverse Selection ◽  
Small Firms ◽  
Order Theory ◽  
Selection Problem ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Internal Resources ◽  
Debt Capacity ◽  
Adverse Selection Problem

The pecking order theory of corporate capital structure developed by states that issuing securities is subject to an adverse selection problem. Managers endowed with private information have incentives to issue overpriced risky securities. But they also understand that issuing such securities will result in a negative price reaction because rational investors, who are at an information disadvantage, will discount the prices of any risky securities the firm issues. Consequently, firms follow a pecking order: use internal resources when possible; if internal funds are inadequate, obtain external debt; external equity is the last resort. Large firms rely significantly on internal finance to meet their needs. External net debt issues finance the minor deficits that remain. Equity is not a significant source of financing for large firms. By contrast, small firms lack sufficient internal resources and obtain external finance. Although much of it is equity, there are substantial issues of debt by small firms. Firms are sorted into three portfolios based on whether they have a surplus or a deficit. About 15% of firm-year observations are in the surplus group. Firms primarily use surpluses to pay down debt. About 56% of firm-year observations are in the balance group. These firms generate internal cash flows that are just about enough to meet their investment and dividend needs. They issue debt, which is just enough to meet their debt repayments. They are relatively inactive in equity markets. About 29% of firm-year observations are in the deficit group. Deficits arise because of a combination of negative profitability and significant investments in both real and financial assets. Some financing patterns in the data are consistent with a pecking order: firms with moderate deficits favor debt issues; firms with very high deficits rely much more on equity than debt. Others are not: many equity-issuing firms do not seem to have entirely used up the debt capacity; some with a surplus issue equity. The theory suggests a sharp discontinuity in financing methods between surplus firms and deficit firms, and another at debt capacity. The literature provides little support for the predicted threshold effects. The theoretical work has shown that adverse selection does not necessarily lead to pecking order behavior. The pecking order is obtained only under special conditions. With both risky debt and equity being issued, there is often scope for many equilibria, and there is no clear basis for selecting among them. A pecking order may or may not emerge from the theory. Several articles show that the adverse selection problem can be solved by certain financing strategies or properly designed managerial contracts and can even disappear in dynamic models. Although adverse selection can generate a pecking order, it can also be caused by agency considerations, transaction costs, tax consideration, or behavioral decision-making considerations. Under standard tests in the literature, these alternative underlying motivations are commonly observationally equivalent.

scholarly journals Optimal Contracting with Endogenous Social Norms

2008 ◽  
Vol 98 (4) ◽  
pp. 1459-1475 ◽  
Author(s):  
Paul Fischer ◽  
Steven Huddart
Keyword(s):  
Social Norms ◽  
Adverse Selection ◽  
Social Norm ◽  
Peer Group ◽  
Selection Problem ◽  
Monetary Incentives ◽  
Optimal Contracting ◽  
The Social ◽  
Adverse Selection Problem ◽  
Group Agents

Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent's cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent's peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents' sensitivities to social norms are unobservable. (JEL D23, D82, D86, Z13)

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