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A Discussion of correct measures of information asymmetry

Author: Dierkens, Nathalie INSEAD Area: Finance Series: Working Paper ; 90/29/FIN Publisher: Fontainebleau : INSEAD, 1990.Language: EnglishDescription: 24 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper shows that measures of information asymetry ought to be event-specific and model-specific in order to design correct tests of alternative models of information asymetry. It shows that the traditional measures volatilities, or residual volatilities, are not necessarily correct. The paper presents a correct measure of information asymmetry for the analysis of the equity issue process in the context of Myers and Majluf's models. This measure is a function of the asset structure of the firm, and captures the volatility of the assets in place only. Some empirical evidence suggests that the distinction can matter empirically
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This paper shows that measures of information asymetry ought to be event-specific and model-specific in order to design correct tests of alternative models of information asymetry. It shows that the traditional measures volatilities, or residual volatilities, are not necessarily correct. The paper presents a correct measure of information asymmetry for the analysis of the equity issue process in the context of Myers and Majluf's models. This measure is a function of the asset structure of the firm, and captures the volatility of the assets in place only. Some empirical evidence suggests that the distinction can matter empirically

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