Information Asymmetry and Financing Decisions

32 Pages Posted: 9 Mar 2011

See all articles by Wolfgang Bessler

Wolfgang Bessler

Justus-Liebig-University Giessen

Wolfgang Drobetz

University of Hamburg

Matthias C. Grninger

affiliation not provided to SSRN


This study conducts tests of the pecking order theory using an international sample with more than 6000 firms over the period from 1995 to 2005. The high correlation between net equity issuances and the financing deficit discredits the static pecking order theory. Rather than analyzing the predictions of the theory, we test its core assumption that information asymmetry is an important determinant of capital structure decisions. Our empirical results support the dynamic pecking order theory and its two testable implications. First, the probability of issuing equity increases with less pronounced firm-level information asymmetry. Second, firms exploit windows of opportunity by making relatively larger equity issuances and build up cash reserves (slack) after declines in firm-level information asymmetry. Firms from common law countries use parts of their proceeds from an equity issuance to redeem debt and to rebalance their capital structure. These findings are consistent with a time-varying adverse selection explanation of firms' financing decisions.

Suggested Citation

Bessler, Wolfgang and Drobetz, Wolfgang and Grninger, Matthias C., Information Asymmetry and Financing Decisions. International Review of Finance, Vol. 11, No. 1, pp. 123-154, 2011. Available at SSRN: or

Wolfgang Bessler (Contact Author)

Justus-Liebig-University Giessen ( email )

Center for Finance and Banking
Licher Strasse 74
Giessen, D-35394
49-641-9922460 (Phone)
49-641-9922469 (Fax)


Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148

Matthias C. Grninger

affiliation not provided to SSRN

No Address Available

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