【Topic】Dynamic Information Asymmetry, Financing, and Investment Decisions

【Speaker】Haoxiang Zhu，Assistant Professor, MIT Sloan School of Management

【Time】 Tuesday, November 5, 2013, 12:30-14:00

【Venue】Room 401, Weilun Building, Tsinghua SEM.

【Language】English

【Organizer】Department of Finance

【Target Audience】Faculty Members and Graduate Students

【Background Information】

Haoxiang Zhu is an Assistant Professor of Finance at the MIT Sloan School of Management. Zhu works mainly on asset pricing and financial market structure and design. His research probes how the designs of financial markets affect asset price behavior, liquidity, and efficiency.

Zhu's recent papers investigate the effect of dark pools on price discovery and liquidity, the design of CDS auctions, search and pricing in OTC markets, the term structure of interest rates, and the central clearing of OTC derivatives. Zhu holds a BA in mathematics and computer science from the University of Oxford and a PhD in Finance from the Stanford Graduate School of Business.

Zhu’s recent research projects investigate the effect of dark pools on price discovery and liquidity, the design of credit event auctions, ex post equilibrium and optimal trading frequency, gold lease rates, and dynamic information asymmetry with financing and investment.

【Abstract】

We reexamine the classic yet static information-asymmetry model of Myers and Majluf (1984) in a fully dynamic market. A firm has access to an investment project and can finance it by debt or equity. The market learns the quality of the firm over time by observing cash flows generated by assets in place. In the dynamic equilibrium, the firm optimally delays investment, but investment eventually takes place. In a two-threshold" equilibrium, a high-quality firm invests only if the market's belief goes above an optimal upper threshold, and a low-quality firm invests if the market's belief goes above the upper threshold or below a lower threshold. Under certain conditions, such as high volatilities of cash flows, a different \four-threshold" equilibrium emerges. Moreover, holding fixed the project NPV and all else, a project with a lower probability of success is financed by equity, whereas a project with a higher probability of success is financed by debt.