Issue of common stock
We learnt the concepts of
• Market efficiency
• Information asymmetry, how information asymmetry affects Market efficiency
• When is the right time for issuing common stocks
• What care needs to be taken while issuing stocks, avoiding Market for lemons situation
• How the stock price is impacted in efficient markets
• The difference between efficient markets and real-world market, what makes this difference and
Market efficiency is defined as the degree to which stock prices reflect all available, relevant
information. Information asymmetry is caused when the seller has some private information which
buyer does not have access to. A classic example of this is candidate seeking a job would claim that he
has enough competencies while the recruiter may not have complete access to check candidate’s
competency.
Another pointer is ”Market for Lemons” which directs towards uncertainty of the quality of the product.
Both these points are very closely associated with the question posed here.
Manager shall take a decision to issue common stocks when the prices are risen, if it is a genuine case
due to which the price is risen and there is some fund requirement for some research or to increase
