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Asymmetric Information and Debt Financing: Hie Empirical Importance of Size and Balance Sheet Factors

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  • Rajeev Dhawan

Abstract

In an environment with asymmetric information regarding the outcome of investment activities, the premium on external funds is dependent upon a borrower's financial characteristics. Consequently, a borrower's need for funds and accessibility to the desired amount is interlinked. Using panel data over the 1970-89 period, this study finds that a firm's existing level of indebtedness reduces its current net issuance of long term debt. Bigger firm size, higher net worth and a lower sales to asset ratio alleviate this negative effect. The results suggest that the notion of a stronger balance sheet, which governs a firm's access to the capital market, should be extended to include the non-financial sales to asset ratio variable.

Suggested Citation

  • Rajeev Dhawan, 1997. "Asymmetric Information and Debt Financing: Hie Empirical Importance of Size and Balance Sheet Factors," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(2), pages 189-202.
    • Handle: RePEc:taf:ijecbs:v:4:y:1997:i:2:p:189-202
    DOI: 10.1080/758516227
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    Cited by:

    1. Dhawan, Rajeev & Jochumzen, Peter, 1999. "Stochastic Frontier Production Function With Errors-In-Variables," Working Papers 1999:007, Lund University, Department of Economics.
    2. Dhawan, Rajeev, 2001. "Firm size and productivity differential: theory and evidence from a panel of US firms," Journal of Economic Behavior & Organization, Elsevier, vol. 44(3), pages 269-293, March.
    3. Rajeev Dhawan & Geoffrey Gerdes, 1997. "Estimating Technological Change Using a Stochastic Frontier Production Function Framework: Evidence from U.S. Firm-Level Data," Journal of Productivity Analysis, Springer, vol. 8(4), pages 431-446, November.

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    More about this item

    Keywords

    Asymmetric information; Tobin's q; Fixed effects; net worth; Liquidity; Balance sheet; JEL classifications: D82; E22;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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