Optimal capital structure and credit spread under incomplete information

Bo Liu, Yang Liu, Juan Peng and Jinqiang Yang

International Review of Economics & Finance, 2017, vol. 49, issue C, 596-611

Abstract: This paper builds a novel learning model by incorporating information incompleteness to extend the traditional capital structure tradeoff theories. We find that myopic agents without learning will make a more conservative debt policy, which provides an alternative explanation for the long-standing under-leveraged puzzle. Also, we find learning under incomplete information additionally generates premiums on corporate-debt yield spread. Overall, this paper extends capital structure literature from the perspective of learning under incomplete information and contributes to explain the under-leveraged nature of most firms.

Keywords: Capital structure; Credit spread; Default decision; Incomplete information; Learning (search for similar items in EconPapers)
JEL-codes: G11 G12 G32 G33 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:49:y:2017:i:c:p:596-611

DOI: 10.1016/j.iref.2017.03.020

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