Information Asymmetry, Mispricing and Security Issuance

Abstract

I find that managers avoid (prefer) issuing securities when they perceive their firms to be undervalued (overvalued) based on their superior information. Undervaluation (overvaluation) results in higher (lower) equity and debt growth. However, equity growth is more sensitive than debt growth to mispricing, leading to an increase (decrease) in financial leverage. These effects are pronounced among firms with high information asymmetry and high cash holdings. As a proxy for information asymmetry-driven mispricing, I exploit changes in purchase obligations before disclosure through 10-K filings. Purchase obligations are positively associated with future performance, but are reflected in Tobin's Q and analysts' EPS forecasts only after disclosure.