Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-03T01:39:28.411Z Has data issue: false hasContentIssue false
  • English
  • Français

Debt versus Equity under Asymmetric Information

Published online by Cambridge University Press:  06 April 2009

M. P. Narayanan
Get access Rights & Permissions [Opens in a new window]

Abstract

In a world of asymmetric information in which only the insiders know the quality of the firm, it is claimed that debt, even if it is risky, is more advantageous than outside equity because issuance of debt is less attractive to inferior firms. The advantage to debt arises from the fact that it can keep unprofitable firms out of the market, thus improving the average quality of firms in the market. This advantage exists even if the firms cannot be perfectly sorted in the signaling equilibrium.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 1 , March 1988 , pp. 39 - 51
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Akerloff, G. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics, 84 (08 1970), 488–500.CrossRefGoogle Scholar
Bhattacharya, S. “Nondissipative Signalling Structures and Dividend Policy.” Quarterly Journal of Economics, 95 (08 1980), 1–24.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (05/06 1973), 637–659.CrossRefGoogle Scholar
Constantinides, G., and Grundy, B.. “Optimal Investment with Stock Repurchase and Financing as Signals.” Working Paper, Center for Research in Security Prices, Univ. of Chicago (05 1986).Google Scholar
Heinkel, R. “A Theory of Capital Structure Relevance under Imperfect Information.” Journal of Finance, 37 (12 1982), 1141–1150.CrossRefGoogle Scholar
Holmstrom, B. “Moral Hazard and Observability.” Bell Journal of Economics, 10 (Spring 1979), 74–91.CrossRefGoogle Scholar
Jensen, M. G., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (10 1976), 305–360.CrossRefGoogle Scholar
Lee, W. L.; Thakor, A. V.; and Vora, G.. “Screening, Market Signalling and Capital Structure Theory.” Journal of Finance, 38 (12 1983), 1507–1518.CrossRefGoogle Scholar
Leland, H., and Pyle, D.. “Information Asymmetries, Financial Structure and Financial Intermediation.” Journal of Finance, 32 (05 1977), 371–387.CrossRefGoogle Scholar
Miller, M. H. “Debt and Taxes.” Journal of Finance, 32 (05 1977), 261–275.Google Scholar
Myers, S. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (11 1977), 147–175.CrossRefGoogle Scholar
Myers, S., and Majluf, N. S.. “Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (06 1984), 187–221.CrossRefGoogle Scholar
Narayanan, M. P. “Determinants of Capital Structure: A Signalling Approach.” Working Paper, Univ. of Florida (12 1985).Google Scholar
Narayanan, M. P. “Corporate Lemons and Capital Structure.” Working Paper, Univ. of Florida (05 1986).Google Scholar
Ross, S. A. “The Determination of Financial Structure: The Incentive Signalling Approach.” The Bell Journal of Economics, 8 (Spring 1977), 23–40.CrossRefGoogle Scholar
Rothschild, M., and Stiglitz, J.. “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information.” Quarterly Journal of Economics, 90 (11 1976), 629–649.CrossRefGoogle Scholar