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Information Aggregation Through Stock Prices and the Cost of Capital

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  • Olga Gorelkina

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Wolfgang Kuhle

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn)

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    Abstract

    This paper studies a firm’s optimal capital structure in an environment, where the firm’s stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose how much information to acquire privately, which induces a positive relation between the amount of equity issued and the stock price signal’s precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist.

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    Bibliographic Info

    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2013_18.

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    Date of creation: Oct 2013
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    Handle: RePEc:mpg:wpaper:2013_18

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    Related research

    Keywords: Information Aggregation; capital structure; Sequential Markets; Market Depth;

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    1. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
    2. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
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