IDEAS home Printed from
   My bibliography  Save this paper

Signalling with debt and equity: a unifying approach and its implications for the Pecking-Order hypothesis and competitive credit rationing


  • Heider, Florian

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))


The paper sets out to tackle the following puzzle when insiders of a firm have more information than outside investors. The insiders’ desire to sell overpriced securities creates an Adverse Selection problem leading to two contradictory results. On the one hand, it leads to Myers & Majluf (1984)’s Pecking-Order hypothesis that says that debt finance dominates equity finance. On the other hand it leads to Stiglitz & Weiss (1981)’ credit rationing whose consequence is that equity finance dominates debt finance. The paper resolves the puzzle by allowing firms to issue both debt and equity together and by having a general notion of what it is that insiders know more about. Then the Pecking-Order hypothesis and credit rationing only emerge as two, mutually exclusive, special cases. The paper shows that combinations of debt and equity can be used to credibly signal information for a wide range of parameters. Thus, it provides a generalisation of the existing financial signalling and rationing literatures and helps to explain some contradictory theoretical and empirical results.

Suggested Citation

  • Heider, Florian, 1997. "Signalling with debt and equity: a unifying approach and its implications for the Pecking-Order hypothesis and competitive credit rationing," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jun 2000.
  • Handle: RePEc:ctl:louvir:2000024

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ctl:louvir:2000024. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginie LEBLANC). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.