Asymmetric Information, Cash Holdings and Mortgage renegotiation: Theory and Evidence

The thesis consists of three chapters that investigate the effects and the consequences of information asymmetry on firms’ financing decisions and activities. In the first chapter I review the main papers that researched the asymmetric information problem in the finance literature. In the first paragraphs, I focus on relevant contributions to the signaling theory, analyzing those models that employ as signals the amount of debt held, new equity issues, and dividend distributions respectively, and report the evidences that support or reject their information content. Then, I describe the transition to the game theory approach, which has been widely successful in the years that followed, focusing on three relevant topics in the literature: capital structure decisions, the dividend puzzle, and financial intermediation. In the second chapter I empirically test the relationship between corporate cash holdings and information asymmetry in R&D intensive firms. Two hypotheses are tested, that cash holdings act as a signal of firm performance (and, therefore, that may decrease the degree of information asymmetry that affects the firm) and that the optimal amount of cash holdings for R&D intensive firms is higher than that of non R&D intensive firms. The model is estimated using fixed effects, which I deemed to be the appropriate choice given the characteristics of the panel used for the analysis. In the third chapter I analyze the effects of mortgage renegotiations on social welfare, using a two-period model that is structured as a Bayesian game. I show that, under certain conditions, only a mixed-strategy equilibrium exists, and that renegotiations Pareto-improves total welfare. Although total welfare Pareto-improves, this is just a result of an increase in the borrower’s welfare, while the lender’s welfare does not change. Since the lender seeks profit maximization, he has no incentive to reach the highest level of social welfare. Thus, Government should support mortgage renegotiations to achieve that level of total welfare that the market is unable to reach on its own.