Capital Structure with Asymmetric Information About Value and Risk: Theory and Empirical Analysis

59 Pages Posted: 5 Nov 2008

See all articles by Nikolay Halov

Nikolay Halov

New York University - Stern School of Business

Florian Heider

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

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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.

Suggested Citation

Halov, Nikolay and Heider, Florian, Capital Structure with Asymmetric Information About Value and Risk: Theory and Empirical Analysis (May 2004). NYU Working Paper No. S-CDM-03-17, Available at SSRN: https://ssrn.com/abstract=1295791

Nikolay Halov

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Florian Heider

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Goethe University Frankfurt ( email )

Finance Department
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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