The Information Conveyed by Financial Decisions参考.ppt

Explanations to the Postannouncement Drift Two alternative explanations to the observed postannouncements drift Financial market is inefficient One example: investors are overconfident about their knowledge about the firm. Investors think they have a precise valuation of the firm before the announcement, they update their valuation very little when receiving new information. Asset pricing models are imperfect The existing asset pricing models may fail to incorporate the relevant risk factors, which explain the abnormal returns after the announcement. How Does the Availability of Cash Affect Investments According to the adverse selection theory, external financing (debt financing, equity financing) is more costly than internal generated cash flows (positive NPV projects may be passed up). A firm is viewed as financially constrained if external financing is more costly than the internal funds. If the external funds can be obtained without additional cost, a firm is said to be financially unconstrained. When there is information asymmetry in the financial market, the investments of firms should rely more on the internal cash flow because it is cheaper than the external financing in terms of information asymmetry. How Does the Availability of Cash Affect Investments Investment – Cash Flow Sensitivity A measure indicating whether there is a deadweight cost between internal and external funds. Economic theories (Tobin 1969) have shown that if financial market is perfect, the investment should be uniquely determined by the marginal q of the firm. Empirically investment is regressed on the Tobin’s Q and cash flow. The regression coefficient of cash flow is defined as investment – cash flow sensitivity. If this sensitivity is significantly positive we tend to believe that this is the evidence of information asymmetry and the firms are financially constrained. Cross Sectional Difference in Investment – Cash Flow Sensitivity Fazzari, Peterson and Hubbard (1988) They divide U.S