SEMINAR SERIES No. 11/1415
Asymmetric information and the pecking (dis)order
Prof. Paolo Antonio Fulghieri
Macon G. Patton Distinguished Professor of Finance
Kenan-Flagler Business School
University of North Carolina at Chapel Hill
In this paper we revisit the pecking-order theory of Myers and Majluf (1984) in a real options framework, where asymmetric information is the only contracting friction. We show that when insiders are better informed about the assets in place of the firm, relative to the new growth opportunities, equity financing can dominate (i.e., be less dilutive than) debt financing, creating a pecking (dis)order. We find that equity is more likely to dominate debt for younger firms that have larger investment needs, and with riskier, more valuable growth opportunities. Thus, our model can explain why highgrowth firms may prefer equity over debt, and then switch to debt financing as they mature. Finally, we study the optimal security design problem, and we provide conditions for which convertible debt and warrants emerge as optimal securities.
Date: December 9, 2014 (Tuesday)
Venue: Faculty of Business Administration, E22-G015
A Short Biography of Prof. Fulghieri
Prof. Paolo Antonio Fulghieri is the Macon G. Patton Distinguished Professor of Finance, Kenan-Flagler Business School, University of North Carolina at Chapel Hill. He got his Dottore in Discipline Economiche e Sociali from Universita’ Commerciale “Luigi Bocconi” in Milan, Italy, and Ph. D. in Economics from the University of Pennsylvania, Philadelphia, USA.
Prof. Fulghieri is actively conducting research in corporate finance and in its interactions with investment and commercial banking. As a result of his research activity, he has published several papers in leading finance journals, such as the Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Financial Intermediation, Journal of Financial and Quantitative Analysis and the Journal of Banking and Finance. His research papers include: “Investment bank reputation, information production, and financial intermediation,” “Why include warrants in new equity issues: A theory of unit IPOs,” “A theory of the going public decision,” “Synergies and internal agency conflicts: The double-edged sword of mergers,” “Information production, dilution costs, and optimal security design,” “The ownership and financing of innovation in R&D races,” “Size and focus of a venture capitalist’s portfolio,” and “Competition, human capital and innovation incentives.” Between 2006 and 2010 he was an Editor of the Review of Financial Studies, a top-tier finance journal, and he is currently the Executive Editor of the Review of Corporate Finance Studies, a new top-tier finance journal.
Prof. Fulghieri has taught Corporate Finance and the Economics of Information at the Graduate School of Business of Columbia University, from 1987 to 1993, and Financial Management at the J.L. Kellogg Graduate School of Management of Northwestern University, from 1993 to 1995. Between 1995 and 2002 he has taught Corporate Finance in the MBA and in several Executive Educations programs at INSEAD, France, where he has been Dean of the PhD Program. He has also taught Corporation Finance at the Graduate School of Business of the University of Chicago and in several international executive education programs.