Asymmetric Information, Debt Capacity, and Capital Structure
Michael L. Lemmon
University of Utah - Department of Finance
Jaime F. Zender
University of Colorado at Boulder - Department of Finance
June 2, 2016
We present a tradeoff theory of capital structure in which costs associated with asymmetric information are the sole friction. By considering both the amount of debt as well as the restrictiveness of the associated debt covenants a more complete characterization of debt structure is examined than is considered in the standard tax/bankruptcy cost tradeoff model. The leverage choice, the restrictiveness of the associated debt covenants, and the renegotiation of the covenants are examined and empirical implications are developed.
Keywords: Asymmetric Information, Capital Structure, Debt Covenants
JEL Classification: D82, G32
Date posted: March 20, 2012 ; Last revised: August 22, 2016
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