Asymmetric Information and Capital Structure

Anton Miglo ()
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Anton Miglo: Toronto School of Finance

Chapter Chapter 3 in Capital Structure in the Modern World, 2025, pp 43-65 from Springer

Abstract: Abstract Firms insiders have more information about their firms than outsiders. This chapter begins by discussing the blockchain-enabled platform introduced by NASDAQ and the IPO by Square and the role of asymmetric information in these events. It then presents the most famous asymmetric information-based theory of capital structure: the pecking-order theory according to which firms prefer to use internal funds over debt, and debt over equity. The underpricing of newly issued shares is explained. Another important idea follows: risk-averse entrepreneurs retain larger stakes of equity in their companies to signal their quality. Empirical implications of both theories are presented and a literature review is provided. The chapter ends with a discussion about whether asymmetric information is behind the recent financial crisis.

Keywords: Asymmetric information; Pecking order; Signaling; Underpricing (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-85459-0_3

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DOI: 10.1007/978-3-031-85459-0_3

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