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Debt-equity choice as a signal of earnings profile over time

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  • Miglo, Anton

Abstract

This paper analyzes the debt-equity choice for financing a two-stage investment when a firm'’s insiders have private information about the firm's expected earnings. When private information is one-dimensional (for example when short-term earnings are common knowledge while long-term earnings are private information) a separating equilibrium does not exist. When private information is two-dimensional a separating equilibrium may exist where firms with a higher rate of earnings growth issue debt and firms with a low rate of earnings growth issue equity. This provides new insights into the issue of different kinds of securities by different types of firms under asymmetric information as well as the link between debt-equity choice and operating performance.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 47 (2007)
Issue (Month): 1 (March)
Pages: 69-93

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Handle: RePEc:eee:quaeco:v:47:y:2007:i:1:p:69-93

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Web page: http://www.elsevier.com/locate/inca/620167

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Cited by:
  1. Miglo, Anton & Zenkevich, Nikolay, 2005. "Non-hierarchical signalling: two-stage financing game," MPRA Paper 1264, University Library of Munich, Germany, revised 2006.
  2. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics and Finance.
  3. Miglo, Anton, 2010. "The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review," MPRA Paper 46691, University Library of Munich, Germany, revised 2013.
  4. Anton Miglo, 2006. "Optimal compensation contracts under asymmetric information concerning expected earnings," Working Papers 0613, University of Guelph, Department of Economics and Finance.

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