Asymmetric information and agency cost theories

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ASYMMETRIC INFORMATION AND AGENCY COST: RELEVANCE TO A THE MODERN CORPORATION

The issues of asymmetric information and agency problems and related costs are discussed in two (2) among the ten (10) principles that form the basis of financial management.

Asymmetric Information
Asymmetric information is the concern of Principle 6, which is the principle of efficient capital market. Based on this principle, efficient market is a market in which the values of all assets and securities, at any given time, fully reflect all available public information (Keown, 200). This was also confirmed by Mishkin (2007) when he said that in an efficient market, a security's price fully reflects all available information. This indicates the importance of information in investment decisions.
Under the efficient market hypothesis, information is reflected in security prices with such a speed that there are no opportunities for investors to profit from publicly available information. Hence owners and potential investors of a firm are limited to the information that would be publicly available for them. However, there is the issue of asymmetric information that adversely affects the adequacy of information that may be made available to investors.
Asymmetric information exists when the managers of a firm have more information about operations and future prospects than do investors (Gitman, 2006). Because of this, investors may not have enough information that will serve as their basis in their investment decisions. This will affect the demand for stocks and the corresponding ...