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

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  • Miglo, Anton

Abstract

This paper analyzes 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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File URL: http://mpra.ub.uni-muenchen.de/1283/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1283.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:1283

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Keywords: Debt-equity choice; Asymmetric information; Timing of earnings; Long-term underperformance;

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