Definition of Asymmetric information

Asymmetric information

information that is known to some people but not to other people.

Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

Future-Oriented Financial Information

information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. Future-oriented financial information is presented as either a forecast or a projection.

information

bits of knowledge or fact that have been carefully
chosen from a body of data and arranged in a meaningful way

Information asymmetry

A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information-content effect

The rise in the stock price following the dividend signal.

information content of dividends

Dividend increases send good news about cash flow and earnings. Dividend cuts send bad news.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Informational efficiency

The speed and accuracy with which prices reflect new information.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Insider information

Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.

management information system (MIS)

a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
alternative situations

Medical Information Bureau

This organization was established in 1902. The Medical information Bureau (M.I.B.) is a non-profit association of life insurance companies. Its purpose is to detect and deter fraud by providing warnings called, alerts, to member companies. For example, if an insurance applicant advised one insurance company of a heart attack and then applied to another insurance company omitting this history, codes, reported by the first insurance company, indicating a heart attack would alert the second insurance company to the undisclosed history. It is a rarity, however, that the alert is the only notice of a specific medical impairement as most applicants completely disclose their history.

Signaling approach

Approach to the determination of the optimal capital structure asserting that insiders in a
firm have information that the market does not have; therefore, the choice of capital structure by insiders can
signal information to outsiders and change the value of the firm. This theory is also called the asymmetric
information approach.

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