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Information Aggregation Through Stock Prices and the Cost of Capital

Olga Gorelkina and Wolfgang Kuhle ()
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Wolfgang Kuhle: Max Planck Institute for Research on Collective Goods, Bonn

No 2013_18, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: This paper studies a firm’s optimal capital structure in an environment, where the firm’s stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose how much information to acquire privately, which induces a positive relation between the amount of equity issued and the stock price signal’s precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist.

Keywords: Information Aggregation; capital structure; Sequential Markets; Market Depth (search for similar items in EconPapers)
JEL-codes: C73 D83 G10 G32 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-cta, nep-gth and nep-ore
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Journal Article: Information Aggregation through Stock Prices and the Cost of Capital (2018) Downloads
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