DESIGN AND VALUATION OF CORPORATE SECURITIES WITH STRATEGIC DEBT SERVICE AND ASYMMETRIC INFORMATION

Yonghua Pan
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Yonghua Pan: Barclays Capital, 222 Broadway, New York, NY 10038, USA

International Journal of Theoretical and Applied Finance (IJTAF), 1999, vol. 02, issue 02, 201-219

Abstract: This paper studies the effects of strategic debt service, asymmetric information and their interaction on the valuation of corporate securities and on corporate financing decisions. By introducing information asymmetry into a continuous-time setting, our model is able to integrate these two factors in a unified framework. Such a model allows for obtaining valuation results in a separating equilibrium.The basic results of this paper imply that the risk premium of debt could be partly contributed by information effect. This part of risk premium could be very significant for those good firms with a project which will produce much higher cash flows than what the market expects. We also find that a firm's financing decision depends on its primitives: firms are more apt to rely on equity if they have: (1) high growth potential, (2) riskier projects, (3) higher ratio of intangible assets to total assets and (4) lesser information asymmetry; firms would prefer debt, otherwise.

Keywords: Asset pricing; Asymmetric information; Corporate financing; JEL classification code G13; JEL classification code G32 (search for similar items in EconPapers)
Date: 1999
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DOI: 10.1142/S0219024999000133

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