ASYMMETRIC INFORMATION, MANAGERIAL OPPORTUNISM, FINANCING, AND PAYOUTPOLICIES

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 contro l in the firm. When shareholders determine policies, debt financing is always optimal in the presence of either adverse selection or manager ial opportunism. However, when both of these problems are simultaneous ly present, equity issuance can become an optimal signaling mechanism. Shareholders' most preferred signaling mechanism is restricting divid ends, followed by equity financing, and finally underpricing securitie s. When managers determine policies, a reversed hierarchy may be obtai ned.