Capital Structure with Information about the Upside and the Downside

Pierre Chaigneau

MPRA Paper from University Library of Munich, Germany

Abstract: We introduce two dimensions of uncertainty, about the upside and the downside of an asset, in a model of asset valuation under asymmetric information. This justifies capital structures with equity and risky debt for information revelation purposes. However, a capital structure with only one information-sensitive security, equity, can be optimal when investors are less informed about the dimension that matters more for valuation. This is relevant for innovative firms with a large upside subject to strong information asymmetries, which often have abnormally low leverage, and for firms at an intermediate stage of their life cycle that don't issue risky debt.

Keywords: capital structure; downside risk; security design; tranching; upside potential (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-upt
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https://mpra.ub.uni-muenchen.de/121397/1/MPRA_paper_121397.pdf original version (application/pdf)

Related works:
Journal Article: Capital Structure with Information about the Upside and the Downside (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:121397

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