Debt vs. Equity and Asymmetric Information: A Review

51 Pages Posted: 16 Apr 2002

See all articles by Linda Schmid Klein

Linda Schmid Klein

University of Connecticut - Department of Finance

Thomas J. O'Brien

University of Connecticut - Department of Finance

Stephen R. Peters

Kansas State University - Department of Finance

Abstract

Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers-Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.

Keywords: structure, asymmetric information, pecking order hypothesis, timing hypothesis

JEL Classification: G30, G32

Suggested Citation

Schmid Klein, Linda and O'Brien, Thomas J. and Peters, Stephen R., Debt vs. Equity and Asymmetric Information: A Review. Available at SSRN: https://ssrn.com/abstract=305401 or http://dx.doi.org/10.2139/ssrn.305401

Linda Schmid Klein

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-2765 (Phone)
860-486-0634 (Fax)

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)

Stephen R. Peters

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

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