Asymmetric information theory

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Asymmetric information theory is a theory that assumes that managers have more complete information than investors and leads to a preferred pecking order of financing: (1) retained earnings, followed by (2) debt, and then (3) new common stock. Also known as signaling theory.


Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Asymmetric information theory. Assumes managers have more complete information than investors and leads to a preferred “pecking order” of financing: (1) retained earnings, followed by (2) debt, and then (3) new common stock. Also known as signaling theory.

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