Product market efficiency: The bright side of myopic, uninformed, and passive external finance

Noe, Thomas, Rebello, Michael and Rietz, Thomas (2012) Product market efficiency: The bright side of myopic, uninformed, and passive external finance. Management Science, 58 (11). pp. 2019-2036.

Abstract

Short-term financial claims held by uninformed outside investors impose a tax on insider opportunism by diluting the ownership stake of opportunistic owner-managers. By thus limiting managerial opportunism, short-term financing increases firm value and social welfare. When given a choice, owner-managers will prefer socially beneficial short-term external financing over internal financing. We show that these results are equilibrium outcomes of a model where firms can act opportunistically in product markets. Moreover, we document the same beneficial effect of short-term external finance in a laboratory experiment implementing this game.

Item Type: Article
Keywords: Adverse selection; Financing; Reputation; Efficiency
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 18 Mar 2012 15:57
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/2625

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