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Information Asymmetry about Investment Risk and Financing Choice
Author(s) -
Baxamusa Mufaddal,
Mohanty Sunil,
Rao Ramesh P.
Publication year - 2015
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12128
Subject(s) - information asymmetry , economics , asymmetry , capital structure , debt , investment (military) , capital expenditure , work (physics) , market liquidity , equity (law) , finance , business , financial economics , monetary economics , politics , political science , law , mechanical engineering , physics , quantum mechanics , engineering
Though it is generally accepted that information asymmetry has an impact on capital structure policy, the nature of the information asymmetry is not well understood. Recent theoretical work and empirical evidence suggests that financing choice depends upon the information asymmetry associated with the investment risk of the particular use of proceeds. Consistent with this view, using the sources and uses of funds framework, we find that equity is used to fund projects with greater information asymmetry about their risk such as research and development expenditure, while debt is used to fund investments with lower information asymmetry about their risk such as liquidity enhancement.