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A Theory of Capital Structure, Price Impact, and Long-Run Stock Returns under Heterogeneous Beliefs

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  • Onur Bayar
  • Thomas J. Chemmanur
  • Mark H. Liu

Abstract

We study an environment with short-sale constraints and heterogeneous beliefs among outsiders and between insiders and outsiders. Firm insiders choose between equity, debt, and convertible debt to raise external financing. We analyze two settings: one in which heterogeneous beliefs is the only market imperfection and another in which there are significant security issue and financial distress costs. Our model generates a pecking order of external financing different from asymmetric information models, and new predictions for capital structure, sequential tranching of securities, the price impact of security issues, and long-run stock returns. We also provide a new rationale for convertible debt issuance.

Suggested Citation

  • Onur Bayar & Thomas J. Chemmanur & Mark H. Liu, 2015. "A Theory of Capital Structure, Price Impact, and Long-Run Stock Returns under Heterogeneous Beliefs," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 4(2), pages 258-320.
    • Handle: RePEc:oup:rcorpf:v:4:y:2015:i:2:p:258-320.
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