EconPapers    
Economics at your fingertips  
 

Information Asymmetry, Corporate Debt Financing and Optimal Investment Decisions: A Reduced Form Approach

Li Chen () and H. Vincent Poor
Additional contact information
H. Vincent Poor: Princeton University

Finance from University Library of Munich, Germany

Abstract: Under the assumption of information asymmetry between market investors and firm managers, a reduced form model of a firm is developed in order to derive optimal investment strategies and capital structures while taking into account the effects of dividend policies and taxes. The motivation of the reduced form approach lies in its empirical implementation tractability. Closed-form solutions for debt issuance prices and debt values from firm managers' perspective are derived. Considering the inconsistency between the two prices incurred from the asymmetric information, a firm's problem of optimal investment risk determination is presented and solved by trading off two opposing effects: asset substitution and default cost. Furthermore, the optimal dividend policy and tax benefits from debt interest payment are also considered, and the application of the model in portfolio management is discussed. Finally, two simple examples are provided. Under these two specific settings, the optimal investment policies are derived explicitly to illustrate the implementation of the model proposed in this paper and demonstrate the general consistency of the results implied by our methodology and the traditional structural framework.

Keywords: Credir Risk; Information Asymmetry; Reduced Form Approach (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Pages: 30 pages
Date: 2003-12-13
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-mfd
Note: Type of Document - pdf; prepared on Winxp; pages: 30; figures: included 4
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0312/0312008.pdf (application/pdf)

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:wpa:wuwpfi:0312008

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).

 
Page updated 2025-03-20
Handle: RePEc:wpa:wuwpfi:0312008