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Screening, Market Signalling, and Capital Structure Theory
Author(s) -
LEE WAYNE L.,
THAKOR ANJAN V.,
VORA GAUTAM
Publication year - 1983
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1983.tb03837.x
Subject(s) - earnings , shareholder , valuation (finance) , capital structure , context (archaeology) , equity (law) , microeconomics , economics , debt , cost of capital , business , information asymmetry , monetary economics , econometrics , accounting , finance , corporate governance , incentive , paleontology , political science , law , biology
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 approaches. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's a priori imperfectly known earnings distribution and use this information in specifying 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.