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Optimal capital structure and credit spread under incomplete information

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  • Liu, Bo
  • Liu, Yang
  • Peng, Juan
  • Yang, Jinqiang

Abstract

This paper builds a novel learning model by incorporating information incompleteness to extend the traditional capital structure tradeoff theories. We find that myopic agents without learning will make a more conservative debt policy, which provides an alternative explanation for the long-standing under-leveraged puzzle. Also, we find learning under incomplete information additionally generates premiums on corporate-debt yield spread. Overall, this paper extends capital structure literature from the perspective of learning under incomplete information and contributes to explain the under-leveraged nature of most firms.

Suggested Citation

  • Liu, Bo & Liu, Yang & Peng, Juan & Yang, Jinqiang, 2017. "Optimal capital structure and credit spread under incomplete information," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 596-611.
  • Handle: RePEc:eee:reveco:v:49:y:2017:i:c:p:596-611
    DOI: 10.1016/j.iref.2017.03.020
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    Cited by:

    1. Xue, Fei & Wang, Xin & Xie, Yan & Zhang, Weihua, 2022. "Does CEO's early life experience affect corporate bond yield spread? Evidence from China's great famine," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1012-1024.
    2. Chung, Chune Young & Liu, Chang & Wang, Kainan, 2018. "Do firms have target capital structures? Evidence from institutional monitoring," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 65-77.
    3. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    4. Ripamonti, Alexandre, 2019. "Capital Structure Adjustments and Asymmetric Information," MPRA Paper 96936, University Library of Munich, Germany.
    5. Hu, Fan & Wu, Yaoyao & Zhou, Lei, 2022. "Irreversible investment and capacity choice with Bayesian learning," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    6. Zhang, Wenlong & Wang, Haijun, 2021. "Entrepreneurial decisions with idiosyncratic risk and unknown profitability," Economic Modelling, Elsevier, vol. 103(C).

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    More about this item

    Keywords

    Capital structure; Credit spread; Default decision; Incomplete information; Learning;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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