Stuart Myers observed and reported in the early 1980s that there is a pecking order in the way managers actually nance additional capital investments. They rst use money generated internally and then turn to the debt markets for additional funding. They rarely use the equity market. This ordering appears to hold true in the early 1990s as well. One reason suggested for this ordering is that there is information asymmetry between the information sets of the managers and the information sets of the stockholders.

a. Assuming that this asymmetrical relationship is true, under what conditions is it advantageous for the existing shareholders for managers to refrain from the issuance of new stock? (When they believe it to be overpriced by the market or when they believe it to be underpriced?)

b. Whose responsibility is it to reduce information asymmetry?

c. What are some of the actions that would reduce this asymmetry?