Asymmetric Information, Debt Capacity, and Capital Structure

64 Pages Posted: 26 Sep 2012 Last revised: 23 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

A theory of capital structure in which costs associated with asymmetric information are the sole friction is used to present a new perspective on the standard pecking order theory. In the model, both the amount of debt and the restrictiveness of the associated debt covenants are considered to be part of the debt structure, allowing a more complete characterization of the capital structure to be examined. 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: G32, D82

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=2152505 or http://dx.doi.org/10.2139/ssrn.2152505

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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