Financial Leverage, Information Quality, and Efficiency

Posted: 17 Jan 2019 Last revised: 26 Jan 2019

See all articles by Lin Nan

Lin Nan

Purdue University

Xiaoyan Wen

Texas Christian University

Date Written: January 18, 2019

Abstract

In this paper, we examine how financial leverage and information quality interactively affect the equilibrium investment and effort decisions, therefore affect overall efficiency. We find that when the financial leverage is in an intermediate range, overall efficiency may decrease in information quality, because higher information quality discourages the entrepreneur from working hard when the prior project prospect is low. We also find that overall efficiency is very sensitive to financial leverage if information quality is poor; when information quality is higher, overall efficiency becomes less sensitive to leverage. In addition, given financial leverage, the optimal level of information quality to maximize overall efficiency in general "matches" the level of financial leverage.

Keywords: financial leverage, information quality, efficiency

JEL Classification: M41, M48, G21, G32

Suggested Citation

Nan, Lin and Wen, Xiaoyan, Financial Leverage, Information Quality, and Efficiency (January 18, 2019). Available at SSRN: https://ssrn.com/abstract=3315753

Lin Nan

Purdue University ( email )

100 S Grant St
West Lafayette, IN 47907
United States
7654960551 (Phone)

Xiaoyan Wen (Contact Author)

Texas Christian University ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

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