Does Change in the Information Environment Affect Financing Choices?

Xu Li (), Chen Lin and Xintong Zhan ()
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Xu Li: Faculty of Business and Economics, The University of Hong Kong, Pokfulam, Hong Kong
Xintong Zhan: Chinese University of Hong Kong, Ma Liu Shui, Hong Kong

Management Science, 2019, vol. 65, issue 12, 5676-5696

Abstract: Using brokerage mergers and closures as natural experiments, we examine how exogenous changes in the information environment affect a firm’s financing choice. Our difference-in-differences approach shows that exogenous increases in information asymmetry lead firms to substitute away from equity and public debt toward bank debt. Firms with higher risk tend to substitute equity for bank debt, and firms with lower risk tend to substitute bonds for bank debt. The effect of the change in the information environment on a firm’s financing choice is more pronounced for firms with worse information environments, such as those with few initial analysts and younger firms. We demonstrate that the mechanism of the change is through a reduction of the issuance of equity and bonds but with an increase of the issuance of bank loans. Further analysis reveals that such firms tend to reduce long-term borrowing, reduce their issuance of subordinated debt, and increase their revolving credit lines.

Keywords: information environment; analyst coverage; financing choices (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (18)

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