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Debt vs. Equity and Asymmetric Information: A Review

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  • Linda Schmid Klein
  • Thomas J. O’Brien
  • Stephen R. Peters

Abstract

Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers–Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.

Suggested Citation

  • Linda Schmid Klein & Thomas J. O’Brien & Stephen R. Peters, 2002. "Debt vs. Equity and Asymmetric Information: A Review," The Financial Review, Eastern Finance Association, vol. 37(3), pages 317-349, August.
    • Handle: RePEc:bla:finrev:v:37:y:2002:i:3:p:317-349
    DOI: 10.1111/1540-6288.00017
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