We propose that firms endogenize the extent of information asymmetry by choosing the optimal level and channels of direct disclosures or communication with the capital markets. Firms choose more communication when they have a greater potential demand for external equity (characterized by higher growth, less cash, and higher leverage). We demonstrate that a firm's decision to increase communication results in a reduction of information asymmetry that enables them to issue seasoned equities with a higher probability and lower costs. We further document that the previously observed negative market reaction to SEO announcements is attributed only to low-disclosure firms; highdisclosure SEO firms experience no significant adverse market reaction.
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