Information asymmetries and entrepreneurial finance: evidence from theories and empirics

Abstract

It has been widely accepted that asymmetric information is one of the key issues in financing informationally opaque small and entrepreneurial businesses and it is central to understand the lending decision of financiers, such as banks and venture capitalists, and corporate decisions of businesses, in terms of financing, investment and performance. This chapter aims to provide a review on the importance of information asymmetries in entrepreneurial finance from three aspects. First, it reviews existing theoretical frameworks on information asymmetries and entrepreneurial finance. Second, it makes a summary on a variety of empirical measurements of information asymmetries and their roles played in entrepreneurial finance. Finally, this chapter offers empirical evidence on the roles played by information asymmetries in access to finance, investment and working capital management of small and entrepreneurial businesses.