Information Aggregation Through Stock Prices and the Cost of Capital

36 Pages Posted: 3 Oct 2013

See all articles by Olga Gorelkina

Olga Gorelkina

University of Liverpool - Management School (ULMS)

Wolfgang Kuhle

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: October 1, 2013

Abstract

This paper studies a firm’s optimal capital structure in an environment, where the firm’s stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose how much information to acquire privately, which induces a positive relation between the amount of equity issued and the stock price signal’s precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist.

Keywords: Information Aggregation, Capital Structure, Sequential Markets, Market Depth

JEL Classification: G32, D83, C73, G10

Suggested Citation

Gorelkina, Olga and Kuhle, Wolfgang, Information Aggregation Through Stock Prices and the Cost of Capital (October 1, 2013). MPI Collective Goods Preprint, No. 2013/18. Available at SSRN: https://ssrn.com/abstract=2334735 or http://dx.doi.org/10.2139/ssrn.2334735

Olga Gorelkina

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Wolfgang Kuhle (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
Bonn, 53113
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
87
Abstract Views
446
rank
298,864
PlumX Metrics