Capital Structure with Asymmetric Information About Value and Risk: Theory and Empirical Analysis
59 Pages Posted: 5 Nov 2008
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Capital Structure, Risk and Asymmetric Information
Capital Structure with Asymmetric Information About Value and Risk: Theory and Empirical Analysis
Capital Structure with Asymmetric Information About Value and Risk: Theory and Empirical Analysis
Date Written: May 2004
Abstract
The paper presents a simple model arguing that the pecking order theory is an extreme when there is only asymmetric information about value. We show how asymmetric information about both, value and risk, transforms the adverse selection logic underlying the pecking order into a general theory of capital structure that accounts for both debt and equity issues. The model predicts that firms issue more equity and less debt if there is more asymmetric information about risk relative to value. We find robust empirical support for the prediction and document a strong link between risk and capital structure in a large unbalanced panel of publicly traded US firms from 1971 to 2001.
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