Screening, Market Signalling, and Capital Structure Theory

Wayne L. Lee, Anjan V. Thakor () and Gautam Vora
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Wayne L. Lee: University of Santa Clara
Gautam Vora: Pennsylvania State University

Finance from EconWPA

Abstract: This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approachs. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's priori imperfectly known earnings distribution and use this information in specifyihng a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt-equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution.

JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2004-11-10
Note: Type of Document - pdf
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Related works:
Journal Article: Screening, Market Signalling, and Capital Structure Theory (1983)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411023

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