Capital Structure, Risk and Asymmetric Information

Nikolay Halov () and Florian Heider
Additional contact information
Nikolay Halov: Rady School of Management, University of California, San Diego, CA, USA

Quarterly Journal of Finance (QJF), 2011, vol. 01, issue 04, 767-809

Abstract: This paper argues that firms may not issue debt in order to avoid the adverse selection cost of debt. Theory suggests that since debt is a concave claim, it may be mispriced when outside investors are uninformed about firms' risk. The empirical literature has however paid little attention to the caveat that the "lemons" problem of external financing first identified by Myers (1984) only leads to debt issuance, i.e., a pecking order, if debt is risk free or, if it is risky, that it is not mispriced. This paper examines whether and for what firms the adverse selection cost of debt is more than a theoretical possibility and how this cost relates to other costs of debt such as bankruptcy. In the absence of any direct measure of something that is unknown to investors and thus cannot be in the econometrician's information set, we present extensive strong and robust evidence in a large unbalanced panel of publicly traded US firms from 1971 to 2001 that firms avoid issuing debt when the outside market is likely to know little about their risk.

Keywords: Capital structure; risk; asymmetric information; adverse selection costs of debt; pecking order; security issuance (search for similar items in EconPapers)
Date: 2011
References: View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010139211000171
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:01:y:2011:i:04:n:s2010139211000171

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010139211000171

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().