Asymmetric Information, Security Design, and the Pecking (Dis)Order

46 Pages Posted: 22 Jun 2015

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: June 2015

Abstract

We study a security design problem under asymmetric information, in the spirit of Myers and Majluf (1984). We introduce a new condition on the right tail of the firm-value distribution that determines the optimality of debt versus equity-like securities. When asymmetric information has a small impact on the right-tail, risky debt is preferred for low capital needs, but convertible debt is optimal for larger capital needs. In addition, we show that warrants are the optimal financing instruments when the firm has already pre-existing debt in its capital structure. Finally, we provide conditions that generate reversals of the standard pecking order.

Keywords: asymmetric information, debt-equity choice, pecking order, security design

JEL Classification: D82, G32

Suggested Citation

Fulghieri, Paolo and Garcia, Diego and Hackbarth, Dirk, Asymmetric Information, Security Design, and the Pecking (Dis)Order (June 2015). CEPR Discussion Paper No. DP10660. Available at SSRN: https://ssrn.com/abstract=2621544

Paolo Fulghieri (Contact Author)

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

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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