Managerial Preference, Asymmetric Information, and Financial Structur e
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.
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Volume (Year): 42 (1987)
Issue (Month): 4 (September)
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