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Managerial Preference, Asymmetric Information, and Financial Structur e

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  • Blazenko, George W

Abstract

If firm performance affects managers' wealth or reputation, preferences of managers dominate firms' financing decisions. When information about real a sset investment is symmetric, managers finance exclusively with equit y. If managers know more about investment quality than do investors, and if managers are sufficiently risk averse, they signal high qualit y projects with debt. Increases in collateral value decrease debt use Increases in interest rates, that do not change productive opportun ities, increase debt use. The explanation for these and further resul ts is based on underpricing of equity and overpricing of debt at the margin. Copyright 1987 by American Finance Association.

Suggested Citation

  • Blazenko, George W, 1987. " Managerial Preference, Asymmetric Information, and Financial Structur e," Journal of Finance, American Finance Association, vol. 42(4), pages 839-862, September.
  • Handle: RePEc:bla:jfinan:v:42:y:1987:i:4:p:839-62
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    Cited by:

    1. Wong, Kit Pong, 2015. "A regret theory of capital structure," Finance Research Letters, Elsevier, vol. 12(C), pages 48-57.
    2. Fenech, Jean-Pierre & Skully, Michael & Xuguang, Han, 2014. "Franking credits and market reactions: Evidence from the Australian convertible security market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 1-19.
    3. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    4. Gharbi, Sami & Sahut, Jean-Michel & Teulon, Frédéric, 2014. "R&D investments and high-tech firms' stock return volatility," Technological Forecasting and Social Change, Elsevier, vol. 88(C), pages 306-312.
    5. Shenoy, Catherine & Koch, Paul D., 1996. "The firm's leverage-cash flow relationship," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 307-331, February.
    6. Paul Gatward & Ian G. Sharpe, 1996. "Capital Structure Dynamics with Interrelated Adjustment: Australian Evidence," Australian Journal of Management, Australian School of Business, vol. 21(2), pages 89-112, December.

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