Stock Price Movements in Response to Stock Issues under Asymmetric Information

  • Author(s): WILLIAM S. KRASKER
  • Published: Apr 30, 2012
  • Pages: 93-105
  • DOI: 10.1111/j.1540-6261.1986.tb04493.x

ABSTRACT

This paper characterizes the function relating the number of new shares issued by a firm to the resulting change in the firm's stock price, when insiders are asymmetrically informed. We show that, in equilibrium, the stock price will be a decreasing function of the issue size; moreover, the rate of decrease can be so rapid to cause “equity rationing.” We also show that there will be underinvestment relative to the symmetric information case.

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