In this paper, we consider the impact of information asymmetry regarding the maturity structure of cash flows on the debt maturity decision. We demonstrate that, in this context, long-term debt is generally the form of debt financing most effective in alleviating the adverse selection problem. We also show that costs of adverse selection may induce some mismatching of debt maturity and asset maturity in the presence of significant transaction costs. Linking executive compensation to stock price performance is predicted to decrease the usual positive price response to dividend increases for two reasons. Two, increasing pay-performance sensitivity reduces the need for dividends as a means of reducing agency costs.
Additional findings are most consistent with the agency cost explanation.
There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open-market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open-market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open-market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.