How The effect of information asymmetry affects on business decisions
Academic Writing in English for Graduate Students, Spring 2014
How The effect of information asymmetry affects on business decisions
Hee Jung Kang
Business Department, Korea University
Paying dividends to shareholders may benefit to some companies’ chief executive officers (CEO). It is because they receive stock options as an incentive for any dividends issuesincentives. The sShareholders of some firms vote on whether to pay dividends or to invest in valuable projects. A CEO may try to make encourage shareholders to vote to payfor dividends using information asymmetry. Information asymmetry means a situation where one party has more or superior information compared to another in a transaction. This harmful situation, in which one party’s lack of knowledge may lead to disadvantages of, often happens in business decisions. Some companies have tried for shareholders to limit access to financial information to pursue them shareholders to agree to pay for dividends rather than to spend money for on investing investment, especially in R&D business and growth options. Early studies have found that dividends have a significantly negative influence on investment (Peterson, 1983) due to information asymmetry, even if dividends should not affecthave no effect. This essay will summarize how information asymmetry affects business decisions in R&D investments and growth options.
First of all, in R&D investment, higher information asymmetry between CEO and shareholders can occur due to greater uncertainty on the future benefits relative to capital investment, leading to moral hazard problems (Chan, 2001). Executives may force shareholders to choose to pay dividends rather than to pursue valuable investment projects on limited internal funds. It is because having little financial information provided by CEO leads shareholders to make an invaluable sub-optimal business decisions. To receive funding from outside investors, firms may spend money for on conference events
How The effect of information asymmetry affects on business decisions
Hee Jung Kang
Business Department, Korea University
Paying dividends to shareholders may benefit to some companies’ chief executive officers (CEO). It is because they receive stock options as an incentive for any dividends issuesincentives. The sShareholders of some firms vote on whether to pay dividends or to invest in valuable projects. A CEO may try to make encourage shareholders to vote to payfor dividends using information asymmetry. Information asymmetry means a situation where one party has more or superior information compared to another in a transaction. This harmful situation, in which one party’s lack of knowledge may lead to disadvantages of, often happens in business decisions. Some companies have tried for shareholders to limit access to financial information to pursue them shareholders to agree to pay for dividends rather than to spend money for on investing investment, especially in R&D business and growth options. Early studies have found that dividends have a significantly negative influence on investment (Peterson, 1983) due to information asymmetry, even if dividends should not affecthave no effect. This essay will summarize how information asymmetry affects business decisions in R&D investments and growth options.
First of all, in R&D investment, higher information asymmetry between CEO and shareholders can occur due to greater uncertainty on the future benefits relative to capital investment, leading to moral hazard problems (Chan, 2001). Executives may force shareholders to choose to pay dividends rather than to pursue valuable investment projects on limited internal funds. It is because having little financial information provided by CEO leads shareholders to make an invaluable sub-optimal business decisions. To receive funding from outside investors, firms may spend money for on conference events
References: Chan, L. (2001). The stock market valuation of research and development expenditures. Journal of Finance, 56, 2431–2456. Dhrymes, P. (1967). Investment, dividends and external finance behavior of firms. In Determinants of investment behavior. New York, NY: Columbia University Press. Hall, B. (2010). The financing of R&D and innovation. Amsterdam: Elsevier B.V. Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. The American Economic Review 46, 97–113. Peterson, P. (1983). A reexamination of the empirical relationship between investment and financing decisions. The Journal of Financial and Quantitative Analysis 18 (4), 439–453. Smith, C. W. (1992). The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics 32, 263–292.