| This dissertation studies the importance of information asymmetry for firms' financing and divestiture decisions. In my first essay, I derive and test new implications about how information asymmetry and debt capacity concerns interact to determine the financing behavior of firms. A model is established to predict that the probability of debt issuance will be a non-monotonic function of the size of the financing deficit. Empirical tests on a sample of firms from Compustat from 1971--1998 classified into five size groups demonstrate that, even after allowing for the possible endogeneity of the financing deficit, the predicted non-monotonicity prevails for all size groups of firms, indicating the relevance of both adverse selection costs and debt capacity constraints for firms' financing decisions. In the second essay, I document strong empirical results that show that firms' financing behavior is significantly affected by the number of analysts that follow the firm, and the impact of higher analyst following is consistent with the implications of capital structure theories about how lower information asymmetry should affect firms' financing choices. In the third essay, I model the divergence in incentives between managers and shareholders with respect to divestiture of ongoing projects. My results show that, when certain conditions are satisfied, inefficient divestiture would occur in equilibrium. In this equilibrium, managers may blindly divest projects to jam the market inference. |
