Asymmetric Information, Debt Capacity, and Capital Structure
64 Pages Posted: 26 Sep 2012 Last revised: 23 Aug 2016
Date Written: June 2, 2016
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: Suggested Citation