Capital Structure with Information about the Upside and the Downside

Pierre Chaigneau

Journal of Financial and Quantitative Analysis, 2024, vol. 59, issue 8, 3921-3958

Abstract: I 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 do not issue risky debt.

Date: 2024
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Working Paper: Capital Structure with Information about the Upside and the Downside (2023)
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