Asymmetric Information and the Pecking (Dis)Order

51 Pages Posted: 20 Mar 2012 Last revised: 20 Mar 2013

See all articles by Paolo Fulghieri

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)

Diego Garcia

University of Colorado at Boulder - Leeds School of Business; University of North Carolina (UNC) at Chapel Hill - Finance Area

Dirk Hackbarth

Boston University - Department of Finance & Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: March 18, 2013

Abstract

In this paper we show that when growth options represent a significant component of overall firm value, equity financing can dominate (i.e., be less dilutive than) debt financing under asymmetric information. In particular, we find that equity is more likely to dominate debt for younger firms with larger investment needs and with riskier growth opportunities. Thus, our model can explain why high-growth firms may prefer equity over debt, and then switch to debt as they mature. We also fid that equity financing is relatively more attractive when a firm already has debt in its capital structure. In addition, equity can dominate debt in multidivisional firms. Finally, we provide new predictions on the cross-sectional variation of capital structures.

Keywords: Capital Structure

JEL Classification: G32

Suggested Citation

Fulghieri, Paolo and Garcia, Diego and Hackbarth, Dirk, Asymmetric Information and the Pecking (Dis)Order (March 18, 2013). UNC Kenan-Flagler Research Paper No. 2012-6. Available at SSRN: https://ssrn.com/abstract=2024666 or http://dx.doi.org/10.2139/ssrn.2024666

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Diego Garcia (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Dirk Hackbarth

Boston University - Department of Finance & Economics ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)

HOME PAGE: http://people.bu.edu/dhackbar/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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