The Journal of Finance

Debt Financing under Asymmetric Information

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04798.x

GAUTAM GOSWAMI, THOMAS NOE, MICHAEL REBELLO

We analyze the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. We show that, if the asymmetry of information is concentrated around long‐term cash flows, firms finance with coupon‐bearing long‐term debt that partially restricts dividend payments. If the asymmetry of information is concentrated around near‐term cash flows and there exists considerable refinancing risk, firms finance with coupon‐bearing long‐term debt that does not restrict dividend payments. Finally, if the asymmetry of information is uniformly distributed across dates, firms finance with short‐term debt.

Asymmetric Information, Managerial Opportunism, Financing, and Payout Policies

Published: 06/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02697.x

THOMAS H. NOE, MICHAEL J. REBELLO

We examine corporate issuance and payout policies in the presence of both adverse selection (in capital markets) and managerial opportunism. Our results establish the importance of the locus of decision control in the firm. When shareholders determine policies, debt financing is always optimal in the presence of either adverse selection or managerial opportunism. However, when both of these problems are simultaneously present, equity issuance can become an optimal signaling mechanism. Shareholders' most preferred signaling mechanism is restricting dividends, followed by equity financing, and finally underpricing securities. When managers determine policies, a reversed hierarchy may be obtained.

Corporate Board Composition, Protocols, and Voting Behavior: Experimental Evidence

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00595

Ann B. Gillette, Thomas H. Noe, Michael J. Rebello

We examine voting by a board designed to mitigate conflicts of interest between privately informed insiders and owners. Our model demonstrates that, as argued by researchers and the business press, boards with a majority of trustworthy but uninformed “watchdogs” can implement institutionally preferred policies. Our laboratory experiments strongly support this conclusion. Our model also highlights the necessity of penalties on insiders when there is dissension among board members. However, penalties for dissent appeared to have little impact on the experimental outcomes.

Corporate Financing: An Artificial Agent‐based Analysis

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00554

Thomas H. Noe, Michael J. Rebello, Jun Wang

We examine corporate security choice by simulating an economy populated by adaptive agents who learn about the structure of security returns and prices through experience. Through a process of evolutionary selection, each agent gravitates toward strategies that generate the highest payoffs. Despite the fact that markets are perfect and agents maximize value, a financing hierarchy emerges in which straight debt dominates other financing choices. Equity and convertible debt display significant underpricing. In general, the smaller the probability of loss to outside investors, the more likely the firm is to issue the security and the smaller the security's underpricing.

The Evolution of Security Designs

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01052.x

THOMAS H. NOE, MICHAEL J. REBELLO, JUN WANG

We consider a competitive and perfect financial market in which agents have heterogeneous cash flow valuations. Instead of assuming that agents are endowed with rational expectations, we model their behavior as the product of adaptive learning. Our results demonstrate that adaptive learning affects security design profoundly, with securities mispriced even in the long run and optimal designs trading off underpricing against intrinsic value maximization. The evolutionary dominant security design calls for issuing securities that engender large losses with a small but positive probability, but that otherwise produce stable payoffs, almost the exact opposite of the pure state claims that are optimal in the rational expectations framework.