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

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Author Info
Anton Miglo () (University of Guelph, Department of Economics.)

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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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Paper provided by University of Guelph, Department of Economics in its series Working Papers with number 0607.

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Length: 27 pages
Date of creation: 2006
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Handle: RePEc:gue:guelph:2006-7

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics. [Downloadable!]
  2. Anton Miglo & Nikolay Zenkevich, 2006. "Non-hierarchical signalling: two-stage financing game," Working Papers 0603, University of Guelph, Department of Economics. [Downloadable!]
    Other versions:
  3. Anton Miglo, 2006. "Optimal compensation contracts under asymmetric information concerning expected earnings," Working Papers 0613, University of Guelph, Department of Economics. [Downloadable!]
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