Debt Financing under Asymmetric Information

Gautam Goswami, Thomas Noe () and Michael J Rebello

Journal of Finance, 1995, vol. 50, issue 2, 633-59

Abstract: The authors analyze the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. They show that, if the asymmetry of information is concentrated around long-term cash flows, firms finance with coupon-bearing long-term debt that partially restricts dividend payments. If the asymmetry of information is concentrated around near-term cash flows and there exists considerable refinancing risk, firms finance with coupon-bearing long-term debt that does not restrict dividend payments. Finally, if the asymmetry of information is uniformly distributed across dates, firms finance with short-term debt. Copyright 1995 by American Finance Association.

Date: 1995
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