Debt Financing under Asymmetric Information

Gautam Goswami · Thomas H. Noe · Michael J. Rebello

74 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Corporate Insolvency and Governance Working Capital and Financial Performance

Abstract

ABSTRACT We analyze the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. We show that, if the asymmetry of information is concentrated around long‐term cash flows, firms finance with coupon‐bearing long‐term debt that partially restricts dividend payments. If the asymmetry of information is concentrated around near‐term cash flows and there exists considerable refinancing risk, firms finance with coupon‐bearing long‐term debt that does not restrict dividend payments. Finally, if the asymmetry of information is uniformly distributed across dates, firms finance with short‐term debt.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1995The Maturity Structure of Corporate Debt 1991Debt Maturity Structure and Liquidity Risk 1986Asymmetric Information and Risky Debt Maturity Choice 1993Seniority and maturity of debt contracts 1980A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK 1987Efficient Financing under Asymmetric Information 1994Optimal Design of Securities under Asymmetric Information

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