Information Asymmetry and Capital Structure: Evidence from Regulation FD

52 Pages Posted: 10 Jan 2008 Last revised: 12 Feb 2015

See all articles by Reining Petacchi

Reining Petacchi

Georgetown University - Department of Accounting and Business Law

Date Written: January 1, 2015

Abstract

This study uses Regulation Fair Disclosure (FD) as a plausibly exogenous shock to the information environment to identify the causal effect of information asymmetry on corporate financing behavior. Although Regulation FD prevents firms from selectively disclosing material information to market professionals in the equity market, firms can still do so to banks and rating agencies in the debt market. The standard’s differential disclosure requirements lead to differential changes in the information environments between the two markets, providing a reasonably useful setting to examine the effect of information asymmetry on firms’ capital structure. I find that firms with a high level of information asymmetry increase debt more than firms with a low level of information asymmetry post-Regulation FD. The results suggest that managers adjust the target leverage ratios to rely more on debt when facing higher costs of equity.

Suggested Citation

Petacchi, Reining, Information Asymmetry and Capital Structure: Evidence from Regulation FD (January 1, 2015). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1082046 or http://dx.doi.org/10.2139/ssrn.1082046

Reining Petacchi (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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