Gestao do paradoxo

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Seminar, December 6th., 2007

7. december 2007

Seminar December, 2007

Asymmetric information and the financing of SMEs: An asset side story Jan Bartholdy Århus School of Business Cesario Mateus University of Greenwich Very preliminary work!! Comments are required!!!

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Aim of paper
To test the impact of asymmetric informationon the financing of SME’s − Testing of the Pecking Order Theory for SMEs Why SME’s: − SME’s are more opaque − Portugal has a less developed financial system. Data on 7546 industrial firms 1991 to 2000 Unique data set

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Asymmetric information Two solutions Asymmetric information

Separating equilibrium

Pooling equilibriumMonitoring Collateral

Pecking order

Same rate for all financing

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Pooling Equilibrium Standard Pecking Order Theory
Assumption: We are in a separating equilibrium ⇒ Firms will only issue equity when overvalued ⇒ Markets know this: ⇒ Cost of equity is high = Risk + adverse selection costs ⇒ We end up in a separating equilibrium ⇒Payments on debt contracts are not dependent on the performance of the firm (except for in default): − Asymmetric information is less of a problem − Debt is cheaper than equity, adverse selection costs are lower. Internal financing has no costs due to asymmetric information

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Pecking Order Financing Listed firms
Listed firms − Equity −Debt Pecking Order for listed firms 1. Internal funds 2. Debt 3. Equity
Low

Adverse selection costs
High

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Empirical observations Consistent with POT
Meyers [2001 among other references] : Very few firms issue new equity − Fama and French [2005] − Frank and Goyal [2003] Question − They may issue equity but in smaller amounts Coveroptions etc. When firms announce SEQ stock prices fall (Event study). Profitability often has a negative coefficient when regressing it on a measure for capital structure.

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Asymmetric information Two solutions Asymmetric information

Separating equilibrium

Pooling equilibrium

Monitoring Collateral

Pecking order

Samerate for all financing

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Separating equilibrium
Monitoring costs − Costs of gathering information − Costs of monitoring Different providers of capital have different comparative advantages: − Banks − Suppliers − Credit card companies − Financing companies ⇒ We get different cost functions Does − − ⇒ this imply a pecking order? No, notnecessary Setting marginal costs equal for each of the financing sources. An additional Euro of financing is obtained from all sources.

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Asymmetric information Summary
Different solutions to the asymmetric information problem − Pecking Order Theory – Listed firms − Monitoring: Depends on the “cost functions”

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Asymmetric information Summary
r

D

− A “break” is needed to prevent firms using the cheapest source for all their financing => we can end up with a type of Pecking Order Financing.

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Asymmetric information Summary

D

− The firm will set the marginal costs equal and for a new Euroof required financing will therefore increase all sources by a small amount => trade-off theory.

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Differences between bank financing and capital markets financing
Capital markets: − Loan negotiated at one point in time − Conditions of loans cannot be changed − Agency problems is major determinant Bank − − − financing: Loan is...
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