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Screening, Market Signalling, and Capital Structure Theory

  • Wayne L. Lee

    (University of Santa Clara)

  • Anjan V. Thakor

    (Olin School of Business, Washington University)

  • Gautam Vora

    (Pennsylvania State University)

This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approachs. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's priori imperfectly known earnings distribution and use this information in specifyihng a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt-equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution.

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File URL: http://econwpa.repec.org/eps/fin/papers/0411/0411023.pdf
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Paper provided by EconWPA in its series Finance with number 0411023.

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Date of creation: 10 Nov 2004
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Handle: RePEc:wpa:wuwpfi:0411023
Note: Type of Document - pdf
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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  2. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  3. Joseph E. Stiglitz, 1973. "The Theory of 'Screening', Education, and the Distribution of Income," Cowles Foundation Discussion Papers 354, Cowles Foundation for Research in Economics, Yale University.
  4. Anjan V. Thakor, 2004. "An Exploration of Competitive Signalling Equilibria with 'Third Party' Information Production: The Case of Debt Insurance," Finance 0411028, EconWPA.
  5. Niehans, Jurg & Hewson, John, 1976. "The Eurodollar Market and Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(1), pages 1-27, February.
  6. Guasch, J Luis & Weiss, Andrew, 1980. "Wages as Sorting Mechanisms in Competitive Markets with Asymmetric Information: A Theory of Testing," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 653-64, July.
  7. Allen, Beth E, 1981. "Generic Existence of Completely Revealing Equilibria for Economies with Uncertainty when Prices Convey Information," Econometrica, Econometric Society, vol. 49(5), pages 1173-99, September.
  8. W. Kip Viscusi, 1978. "A Note on "Lemons" Markets with Quality Certification," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 277-279, Spring.
  9. Kraus, Alan & Sick, Gordon A, 1980. " Distinguishing Beliefs and Preferences in Equilibrium Prices," Journal of Finance, American Finance Association, vol. 35(2), pages 335-44, May.
  10. Sick, Gordon, 1981. "Discussion: Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 437-438, November.
  11. Talmor, Eli, 1981. "Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 413-435, November.
  12. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
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