Debt Financing Under Asymmetric Information

Abstract

In this paper we analyze the optimal design of debt- maturity, coupon payments, and dividend payout restrictions under asymmetric information. In our model, if the asymmetry of information is concentrated around long-term cash flows, firms finance with coupon-bearing long-term debt that partially restricts dividend payments. If the asymmetry of information is concentrated around near-term cash flows and there exists a significant possibility that they will be unable to refinance short-term debt, firms finance with coupon-bearing long-term debt that does not restrict dividend payments. Finally, if the asymmetry of information is uniformly distributed across dates, firms finance with short-term debt. Thus, it is the distribution of informational asymmetry across dates rather than the degree of information asymmetry per se that determines firms' debt-financing policies.

JEL Classification: G32