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Asymmetric Information concerning the Variance of Cash Flows: The Capital Structure Choice

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  • Brick, Ivan E
  • Frierman, Michael
  • Kim, Yu Kyung
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    Abstract

    This paper assumes that a higher valued firm is distinguished from its lower valued counterpart by having a cash flow distribution with a lower variance. A separating (sequential) Nash equilibrium signaling model is developed in which firms use the levels of debt and dividends to convey information to the market regarding the variance of their underlying cash flow. In contrast to most, if not all, debt signaling models, the higher quality firm signals its value by issuing new equity (decreasing the leverage) while simultaneously offering cash dividends. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 39 (1998)
    Issue (Month): 3 (August)
    Pages: 745-61

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    Handle: RePEc:ier:iecrev:v:39:y:1998:i:3:p:745-61

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    Cited by:
    1. Gabrielle Wanzenried, 2002. "Signaling with Capital Structure Revisited," Diskussionsschriften dp0214, Universitaet Bern, Departement Volkswirtschaft.
    2. Miglo, Anton, 2006. "Debt-equity choice as a signal of profit profile over time," MPRA Paper 1283, University Library of Munich, Germany.
    3. Anton Miglo, 2006. "Optimal compensation contracts under asymmetric information concerning expected earnings," Working Papers 0613, University of Guelph, Department of Economics and Finance.
    4. Anton Miglo, 2006. "Debt-equity choice as a signal of earnings profile over time," Working Papers 0607, University of Guelph, Department of Economics and Finance.
    5. 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.
    6. Miglo, Anton & Zenkevich, Nikolay, 2005. "Non-hierarchical signalling: two-stage financing game," MPRA Paper 1264, University Library of Munich, Germany, revised 2006.
    7. Alejandro Vargas Sanchez, 2014. "Estructura de capital óptima en presencia de costos de dificultades financieras," Investigación & Desarrollo 0214, Universidad Privada Boliviana, revised Jan 2014.
    8. Miglo, Anton, 2012. "Multi-stage investment, long-term asymmetric information and equity issues," MPRA Paper 46692, University Library of Munich, Germany.

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