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Debt-equity choice as a signal of earnings profile over time

  • Anton Miglo

    ()

    (University of Guelph, Department of Economics.)

This paper analyzes the debt-equity choice for financing a two-stage investment when a firm'’s insiders have private information about the firm's expected earnings. When private information is one-dimensional (for example when short-term earnings are common knowledge while long-term earnings are private information) a separating equilibrium does not exist. When private information is two-dimensional a separating equilibrium may exist where firms with a higher rate of earnings growth issue debt and firms with a low rate of earnings growth issue equity. This provides new insights into the issue of different kinds of securities by different types of firms under asymmetric information as well as the link between debt-equity choice and operating performance.

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Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 0607.

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Length: 27 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:gue:guelph:2006-7
Contact details of provider: Postal: Guelph, Ontario, N1G 2W1
Phone: (519) 824-4120 ext. 53898
Fax: (519) 763-8497
Web page: https://www.uoguelph.ca/economics/

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