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Debt vs. Equity and Asymmetric Information: A Review
Author(s) -
Klein Linda Schmid,
O’Brien Thomas J.,
Peters Stephen R.
Publication year - 2002
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/1540-6288.00017
Subject(s) - information asymmetry , capital structure , economics , adverse selection , equity (law) , debt , empirical evidence , financial economics , empirical research , valuation effects , investment (military) , valuation (finance) , microeconomics , finance , philosophy , epistemology , politics , political science , law
Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers–Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.