Modeling the Expected Effects of Severe Versus Tolerable Information Asymmetry on Firm Growth

This paper compares the financial determinants of firm growth in cases of severe versus tolerable information asymmetry. The paper also compares the observed and stochastic (uncertain) information asymmetry. The data include the nonfinancial firms listed on the NASDAQ100 and DJIA30 for the quarterly period of 1992Q2–2023Q3. The robust results show that (a) firms manage observed and expected (stochastic) severe information asymmetry by focusing on the productivity of fixed assets; (b) the severity of information asymmetry leads firms to reduce debt financing (both short- and long-term) as well as the retention ratio in attempts to decrease the severity of information; (c) the measurement of firm growth using sales-weighted fixed assets growth distinguishes severe and tolerable information asymmetry, which is not realized when the Tobin Q ratio is used; (d) severe and tolerable information asymmetry are systematic factors that affect all firms apart from changes in size; and (e) economic policy uncertainty affects firm growth in addition to the severity of information asymmetry. This paper contributes to the related literature in terms of treating asymmetric information stochastically, as stock prices usually exhibit stochastic patterns. In addition, the results offer insights for both firm management and policy makers regarding the significant financial and macroeconomic factors that can be utilized for managing firm growth in cases of uncertain severe and tolerable information asymmetry.