Information Asymmetry About Investment Risk and Financing Choice

18 Pages Posted: 22 Oct 2015

See all articles by Mufaddal H. Baxamusa

Mufaddal H. Baxamusa

University of St. Thomas

Sunil Mohanty

City University of New York - Department of Finance

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance

Date Written: September/October 2015

Abstract

Though it is generally accepted that information asymmetry has an impact on capital structure policy, the nature of the information asymmetry is not well understood. Recent theoretical work and empirical evidence suggests that financing choice depends upon the information asymmetry associated with the investment risk of the particular use of proceeds. Consistent with this view, using the sources and uses of funds framework, we find that equity is used to fund projects with greater information asymmetry about their risk such as research and development expenditure, while debt is used to fund investments with lower information asymmetry about their risk such as liquidity enhancement.

Keywords: firm investment, capital structure, information asymmetry

Suggested Citation

Baxamusa, Mufaddal H. and Mohanty, Sunil and Rao, Ramesh P., Information Asymmetry About Investment Risk and Financing Choice (September/October 2015). Journal of Business Finance & Accounting, Vol. 42, Issue 7-8, pp. 947-964, 2015. Available at SSRN: https://ssrn.com/abstract=2677469 or http://dx.doi.org/10.1111/jbfa.12128

Mufaddal H. Baxamusa (Contact Author)

University of St. Thomas ( email )

1000 LaSalle Ave.
Minneapolis, MN 55403
United States

Sunil Mohanty

City University of New York - Department of Finance ( email )

2900 Bedford Avenue
Brooklyn, NY 11210
United States

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-1385 (Phone)
405-744-5180 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
854
PlumX Metrics