The role of information has always been an active research area of corporate finance. In particular, asymmetric information between managers and outside investors has received a great deal of attention. Depending on the composition of project quality, it has been shown that this type of information friction leads to underinvestment when even promising projects cannot be financed, or overinvestment when borrowers that are not creditworthy receive funding. Since good borrowers are hurt by the suspicion that they may be bad, managers with profitable projects try to signal themselves in various ways such as pledging collateral, issuing short-term debt, underpricing in IPOs and SEOs, and so on. Managers also have the incentive to manage outside investors' expectation about firms' profitability by garbling noisy signals like earnings. This manipulation leads to income and payout smoothing. In addition, costly asymmetric information implies the pecking-order theory for capital structure, that is, sources of financing can be ranked by their information intensity - internal finance first, next debt, and last, equity issuance.
Asymmetric information also prevails in financial markets. Investors have their own information, and some investors are better informed than others. Researchers have been discussing how trading among those investors under various market structures (such as centralised or not and order or quote-driven) affects the price discovery process, trading volume, market liquidity, etc. Bubbles arise when prices reflect current investors' beliefs about future optimistic investors' beliefs. Market crashes can also occur even without any informative news. Besides, prices may exhibit excess volatility which is well-documented in the equity and foreign exchange markets. In addition, trading frenzies could happen due to strategic complementarities in investors' information acquisition behaviour or investor flows. Based on these results, researchers further debate relevant policy issues like regulation over information disclosure.