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Disclosure, risk sharing, and valuation under asymmetric information

University of British Columbia

This dissertation analyzes risk sharing between an entrepreneur of a firm and its investors, and valuation of the firm when there is an informational asymmetry between the entrepreneur and investors. Two types of informational asymmetries are examined: the adverse selection problem and the moral hazard problem. In the adverse selection problem, the entrepreneur knows an exogenous parameter of value which is unobservable by investors. While maximizing his own welfare, he selects a level of direct disclosure in order to communicate his information to investors. A verification role for a third party is developed such that the verified disclosure is credible due to a costly penalty which is imposed if the disclosure is false. An equilibrium is derived in which investors correctly value the firm after observing the disclosure. In the moral hazard problem, firm value is dependent upon the behavior of the entrepreneur where that behavior is unobservable. The entrepreneur selects costly ownership in his own firm to credibly communicate his behavior to investors. An equilibrium is derived in which investors correctly value the firm after observing the entrepreneur's investment portfolio. In the conclusion, the two informational problems are integrated in order to indicate the similar nature of the problems.

Text

2010-06-01

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http://hdl.handle.net/2429/25306

Business Administration

University of British Columbia

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