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Debt vs. Equity and Asymmetric Information: A ReviewLinda Schmid KleinUniversity of Connecticut - Department of Finance Thomas J. O'BrienUniversity of Connecticut - Department of Finance Stephen R. PetersKansas State University - Department of Finance The Financial Review, August 2002 Abstract: Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers-Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.
Number of Pages in PDF File: 51 Keywords: structure, asymmetric information, pecking order hypothesis, timing hypothesis JEL Classification: G30, G32 Accepted Paper SeriesDate posted: April 16, 2002Suggested CitationContact Information
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