Abstract

Moral Hazard Integration and Signalling in Financing Theory Approaches

The analysis focuses on the influence of an asymmetrical distribution of information between corporate managers and capital market investors about financial management decisions. It distinguishes between two variants of asymmetrical information: hidden action refers to the impossibility of observing corporate management actions, whereas hidden information describes a situation in which corporate managers possess better information about the corporations's earnings position than external capital donors do. Where the distribution of information is asymmetrical in respect of the variance of future financial surpluses, it is possible to signal in a credible manner and free of charge the 'true' value of the variance by combining loan issues with options. The same capital structure is apt to solve hidden action problems completely and free of charge insofar as they bear upon the variance of financial surpluses. Where the problem is one of hidden action combined with hidden information, however, it is possible to remedy the asymmetrical distribution of information by an appropriate financing method, but this approach does not mean choosing the capital structure that would maximize the corporation's total value.