Capital Structure Choice Under Asymmetric Information and Overconfident Managers

28 Pages Posted: 27 Mar 2019 Last revised: 4 Mar 2020

See all articles by Xiehua Ji

Xiehua Ji

Birmingham City University

Anton Miglo

University of Glasgow

Date Written: March 21, 2019


Traditional pecking-order theory (POT) cannot explain why good-quality firms issue equity: this is often considered to be an empirical puzzle. We build a model of capital structure that has elements of both asymmetric information and behavioral finance. Firms have private information about their expected performance. The model also includes overconfident managers. Our model predicts that high-quality firms may issue equity in equilibrium, which contrasts the results in Fairchild (2005). Unlike in Fairchild (2005), managers are not equally overconfident and no exogenously given bankruptcy costs exist in our model. We test our model using a large set of data from the U.S. market and find strong empirical support.

Keywords: asymmetric information; signalling with capital structure; overconfident managers; capital structure and operating performance; pecking-order theory; behavioral finance

JEL Classification: D82, D92, G02, G24, G32

Suggested Citation

Ji, Xiehua and Miglo, Anton, Capital Structure Choice Under Asymmetric Information and Overconfident Managers (March 21, 2019). Available at SSRN: or

Xiehua Ji

Birmingham City University ( email )

School of Social Sciences
City North Campus
Birmingham, West Midlands B42 2SU
United Kingdom

Anton Miglo (Contact Author)

University of Glasgow ( email )

United Kingdom

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