Asymmetric Information and the Pecking (Dis)Order
University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)
University of North Carolina at Chapel Hill - Finance Area
Everett W. Lord Distinguished Faculty Scholar
March 18, 2013
UNC Kenan-Flagler Research Paper No. 2012-6
In this paper we show that when growth options represent a significant component of overall firm value, equity financing can dominate (i.e., be less dilutive than) debt financing under asymmetric information. In particular, we find that equity is more likely to dominate debt for younger firms with larger investment needs and with riskier growth opportunities. Thus, our model can explain why high-growth firms may prefer equity over debt, and then switch to debt as they mature. We also fid that equity financing is relatively more attractive when a firm already has debt in its capital structure. In addition, equity can dominate debt in multidivisional firms. Finally, we provide new predictions on the cross-sectional variation of capital structures.
Number of Pages in PDF File: 51
Keywords: Capital Structure
JEL Classification: G32
Date posted: March 20, 2012 ; Last revised: March 20, 2013
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