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Debt Financing under Asymmetric Information

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  • Goswami, Gautam
  • Noe, Thomas H
  • Rebello, Michael J

Abstract

The authors analyze the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. They show that, 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 considerable refinancing risk, 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. Copyright 1995 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 50 (1995)
Issue (Month): 2 (June)
Pages: 633-59

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Handle: RePEc:bla:jfinan:v:50:y:1995:i:2:p:633-59

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Cited by:
  1. Miglo, Anton, 2006. "Debt-equity choice as a signal of profit profile over time," MPRA Paper 1283, University Library of Munich, Germany.
  2. Chang Woon Nam & Doina Maria Radulescu, 2004. "Does Debt Maturity Matter for Investment Decisions?," CESifo Working Paper Series 1124, CESifo Group Munich.
  3. Miglo, Anton, 2007. "Debt-equity choice as a signal of earnings profile over time," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(1), pages 69-93, March.
  4. Alexander Reisz, 1999. "Temporal Resolution of Uncertainty and Corporate Debt Yields: an Empirical Investigation," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-043, New York University, Leonard N. Stern School of Business-.
  5. Alexander Reisz, 1999. "Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-044, New York University, Leonard N. Stern School of Business-.
  6. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  7. Manak Gupta & Alice Lee, 2006. "An Integrated Model of Debt Issuance, Refunding, and Maturity," Review of Quantitative Finance and Accounting, Springer, vol. 26(2), pages 177-199, March.
  8. Morkötter, Stefan & Westerfeld, Simone, 2009. "Rating model arbitrage in CDO markets: An empirical analysis," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 21-33, March.
  9. Ahn, Sungyoon & Choi, Wooseok, 2009. "The role of bank monitoring in corporate governance: Evidence from borrowers' earnings management behavior," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 425-434, February.
  10. Fu, Richard & Subramanian, Ajay, 2011. "Leverage and debt maturity choices by undiversified owner-managers," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 888-913, September.
  11. Miglo, Anton, 2012. "Multi-stage investment, long-term asymmetric information and equity issues," MPRA Paper 46692, University Library of Munich, Germany.
  12. Miglo, Anton, 2014. "Timing of Earnings and Capital Structure," MPRA Paper 56547, University Library of Munich, Germany.
  13. Arnold, Marc, . "Banks’ Loan Screening Incentives with Credit Risk Transfer: An Alternative to Risk Retention," Working Papers on Finance 1402, University of St. Gallen, School of Finance.

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