How The effect of information asymmetry affects Essays

How The effect of information asymmetry affects Essays How The effect of information asymmetry affects Essay How The effect of information asymmetry affects Essay Academic Writing In English for Graduate Students, Spring 2014 How The effect of information assortment affects on business decisions He Jung Gang 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 Selectivenesss. The shareholders of some firms vote on whether to pay dividends or to Invest In valuable projects. A CEO may try to make encourage hardliners to vote to parlor 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 partys 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 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 affective no effect. This essay will summarize how information asymmetry affects business decisions in R investments and growth options. First of all. In R 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 (Chant, 2001). Executives may Orca 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 If needed or for hilling to make roll the collection of data for reporting for to outside investors. Therefore, firms are likely to cost high for spend a lot to secure funding for R investments (Hall, 2010). Secondly, growth options mean that a company invests to growth of potential future outputs In future. Information asymmetry can also occur in growth options. It Is because growth options have greater uncertainty and Involve unverifiable future cash flow reports (Smith, 1992) and shareholders may be more likely to have difficulties to understanding or estimate estimating future cash flow repossesses reports. When greater competition for internal funds between paying dividends and investing projects occur, companies may be forced to forgo the investments as Coos re reluctant to cut dividends (Lintier, 1956). Information asymmetry will play a vital role negatively to affect business decisions. Again, the higher costs of raising funds As can be seen, due to information asymmetry between executives and shareholders, firms forgo valuable investment projects especially in R and growth options to pay dividends. In summary, information asymmetry plays a crucial role in investment decisions negatively because shareholders can vote to pay dividends rather than to invest in valuable projects in a situation where little data is provided.