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UBC Theses and Dissertations

Three essays on investment and information acquisition/disclosure decisions around equity offerings Li, Yinghua

Abstract

It is often believed that increased information flow can facilitate resource allocations and improve market efficiency in the capital market. Equity-issuing firms can play significant roles in the capital formation process, since they are a major provider of information and possess intimate knowledge about their business. Therefore it is important to understand factors that affect their disclosure incentives. In addition, regulators are concerned with formulating appropriate laws and policies to encourage more disclosure of credible information. Previous disclosure models often assume a pure-exchange economy when analyzing equityissuing firms' disclosure incentives. Such a setting might not be descriptive of equity offerings that involve production decisions. It is also commonly assumed that firm managers are exogenously endowed with private information. However, it usually takes efforts and resources to produce information. As stated in Christensen and Feltham (2003), "it is a manager's ability to acquire and process information efficiently that makes him an effective manager". This thesis extends the standard "new equity" disclosure model in- the literature by introducing production choices and endogenizing firms' information acquisition decisions. It studies the interaction between equity-issuing firms' productive activities- and information acquisition/disclosure decisions. It consists of four parts. Chapter 1 provides a general discussion of theoretical disclosure literature, and briefly introduces the main features and results of the subsequent chapters. Chapter 2 examines how equity-issuing firms' disclosure incentives affect their investment decisions arid their incentives to acquire pre-decision information. Chapter 3 examines the impact of different disclosure policies on firms' disclosure incentives and investment decisions. Chapter 4 introduces shareholder litigation, and analyzes the resulting disclosure equilibria and efficiencies of production decisions. This research adds to our understanding of the subtle interplay of equity-issuing firms' disclosure and productions decisions. It also provides arguments for caution with respect to setting disclosure policies. It is shown that it is difficult to determine the ex ante optimal policy in a production economy.

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