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News About Zero-Leverage Firms

Author

Listed:
  • Thomas Geelen

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

Abstract

I develop a dynamic capital structure model in which creditors face adverse selection and learn about the firm’s quality from news. Shareholders of a high quality firm prefer to postpone debt issuance so that creditors can learn about the firm’s quality, which lowers the underpricing of its debt. At some point the benefits of waiting no longer outweigh the current tax benefits and shareholders decide to issue debt. This setup endogenously creates a zero-leverage firm, which is expected to issue debt in the future and pays dividends. Finally, I show that shorter maturity debt alleviates the adverse selection and speeds up debt issuance.

Suggested Citation

  • Thomas Geelen, 2016. "News About Zero-Leverage Firms," Swiss Finance Institute Research Paper Series 16-78, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1678
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    More about this item

    Keywords

    zero-leverage; capital structure; debt issuance; adverse selection; debt maturity;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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