Abstract

http://ssrn.com/abstract=566443
 
 

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Capital Structure, Risk and Asymmetric Information


Nikolay Halov


New York University - Stern School of Business

Florian Heider


European Central Bank (ECB)

November 1, 2011

Quarterly Journal of Finance, Vol 1 (4), 767-809 (2011)

Abstract:     
This paper argues that firms may not issue debt in order to avoid the adverse selection cost of debt. Theory suggests that since debt is a concave claim, it may be mispriced when outside investors are uninformed about firms’ risk. The empirical literature has however paid little attention the caveat that the “lemons” problem of external financing first identified by Myers (1984) only leads to debt issuance, i.e. a pecking order, if debt is risk free or, if it is risky, that it is not mispriced. This paper examines whether and for what firms the adverse selection cost of debt is more than a theoretical possibility and how this cost relates to other costs of debt such as bankruptcy. Absent any direct measure of something that is unknown to investors and thus cannot be in the econometrician’s information set, we present extensive strong and robust evidence in a large unbalanced panel of publicly traded US firms from 1971 to 2001 that firms avoid issuing debt when the outside market is likely to know little about their risk.

Number of Pages in PDF File: 57

Keywords: capital structure, risk, asymmetric information, pecking-order hypothesis, adverse selection

JEL Classification: G32

Accepted Paper Series


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Date posted: July 21, 2004 ; Last revised: July 25, 2012

Suggested Citation

Halov, Nikolay and Heider, Florian, Capital Structure, Risk and Asymmetric Information (November 1, 2011). Quarterly Journal of Finance, Vol 1 (4), 767-809 (2011). Available at SSRN: http://ssrn.com/abstract=566443 or http://dx.doi.org/10.2139/ssrn.566443

Contact Information

Nikolay Halov
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Florian Heider (Contact Author)
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
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