Asymmetric Information, Debt Capacity, and Capital Structure

Posted: 20 Mar 2012 Last revised: 22 Aug 2016

See all articles by Michael L. Lemmon

Michael L. Lemmon

University of Utah - Department of Finance

Jaime F. Zender

University of Colorado at Boulder - Department of Finance

Date Written: June 2, 2016

Abstract

We present a tradeoff theory of capital structure in which costs associated with asymmetric information are the sole friction. By considering both the amount of debt as well as the restrictiveness of the associated debt covenants a more complete characterization of debt structure is examined than is considered in the standard tax/bankruptcy cost tradeoff model. The leverage choice, the restrictiveness of the associated debt covenants, and the renegotiation of the covenants are examined and empirical implications are developed.

Keywords: Asymmetric Information, Capital Structure, Debt Covenants

JEL Classification: D82, G32

Suggested Citation

Lemmon, Michael L. and Zender, Jaime F., Asymmetric Information, Debt Capacity, and Capital Structure (June 2, 2016). Available at SSRN: https://ssrn.com/abstract=2024145 or http://dx.doi.org/10.2139/ssrn.2024145

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Jaime F. Zender (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Boulder, CO 80309
United States
303-554-1665 (Phone)
303-492-4689 (Fax)

HOME PAGE: http://www-bus.colorado.edu/faculty/Zender/

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