News About Zero-Leverage Firms

Thomas Geelen
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Thomas Geelen: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute

No 16-78, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: I develop a dynamic capital structure model in which creditors face adverse selection and learn about the firm’s quality from news. Shareholders of a high quality firm prefer to postpone debt issuance so that creditors can learn about the firm’s quality, which lowers the underpricing of its debt. At some point the benefits of waiting no longer outweigh the current tax benefits and shareholders decide to issue debt. This setup endogenously creates a zero-leverage firm, which is expected to issue debt in the future and pays dividends. Finally, I show that shorter maturity debt alleviates the adverse selection and speeds up debt issuance.

Keywords: zero-leverage; capital structure; debt issuance; adverse selection; debt maturity (search for similar items in EconPapers)
JEL-codes: D82 D83 G32 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2016-12
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1678

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