Hostname: page-component-77c89778f8-vpsfw Total loading time: 0 Render date: 2024-07-19T10:29:03.169Z Has data issue: false hasContentIssue false
  • English
  • Français

Asymmetric Information, Debt Capacity, and Capital Structure

Published online by Cambridge University Press:  05 October 2018

Michael L. Lemmon  and
Jaime F. Zender
Get access Rights & Permissions [Opens in a new window]

Abstract

Capital structure choice based on costs associated with asymmetric information is examined in order to present a new perspective on the standard pecking order and trade-off theories. In the model, both the face value of debt and the restrictiveness of the associated debt covenants are chosen as part of the financial structure, allowing a more complete characterization of this decision. Debt structure choice balances ex ante adverse selection against ex post moral hazard, providing a natural integration of the pecking order and trade-off theories and the development of interesting empirical implications.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 31 - 59
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We are especially indebted to Phil Dybvig, Michael Fishman (the referee), and Jeff Zwiebel for insightful comments on a previous draft.  We also thank Matthias Kahl, Chris Leach, Paul Malatesta (the editor), Iulian Obreja, Paul Pfleiderer, Roberto Pinheiro, Michael Roberts, Chris Yung, and seminar participants at Georgetown University, Stanford University, the University of Nebraska, the University of Texas at Austin, the University of Texas at Dallas, and Washington University in St. Louis.

References

Asquith, P.; Gertner, R.; and Scharfstein, D.. “Anatomy of Financial Distress: An Examination of Junk-Bond Issuers.” Quarterly Journal of Economics, 109 (1994), 625–658.Google Scholar
Bradley, M., and Roberts, M. R.. “The Structure and Pricing of Bond Covenants.” Quarterly Journal of Finance, 5 (2015), 1–37.Google Scholar
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.Google Scholar
Cho, I. K., and Kreps, D.. “Signaling Games and Stable Equilibria.” Quarterly Journal of Economics, 102 (1987), 179–222.Google Scholar
Constantinides, G. M., and Grundy, B. D.. “Optimal Investment with Stock Repurchase and Financing as Signals.” Review of Financial Studies, 2 (1989), 445–465.Google Scholar
Davis, J. E.“Optimal Issuance across Markets and over Time.” Working Paper, University of North Carolina (2016).Google Scholar
DeMarzo, P. M., and Fishman, M. J.. “Agency and Optimal Investment Dynamics.” Review of Financial Studies, 20 (2007), 151–188.Google Scholar
Gârleanu, N., and Zwiebel, J.. “Design and Renegotiation of Debt Covenants.” Review of Financial Studies, 22 (2009), 749–781.Google Scholar
Grossman, S. J., and Hart, O. D.. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94 (1986), 691–719.Google Scholar
Hart, O. D., and Moore, J.. “Property Rights and the Nature of the Firm.” Journal of Political Economy, 98 (1990), 19–58.Google Scholar
Hart, O. D., and Moore, J.. “A Theory of Debt Based on the Inalienability of Human Capital.” Quarterly Journal of Economics, 109 (1994), 841–879.Google Scholar
Leland, H. E.“Corporate Debt Value, Bond Covenants, and Optimal Capital Structure.” Journal of Finance, 49 (1994), 1213–1252.Google Scholar
Lemmon, M. L., and Zender, J. F.. “Looking under the Lamppost: An Empirical Examination of the Determinants of Capital Structure.” Working Paper, University of Colorado (2001).Google Scholar
Myers, S. C.“The Capital Structure Puzzle.” Journal of Finance, 39 (1984), 575–592.Google Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.Google Scholar
Nini, G.; Smith, D. C.; and Sufi, A.. “Creditor Control Rights, Corporate Governance, and Firm Value.” Review of Financial Studies, 25 (2012), 1713–1761.Google Scholar
Roberts, M., and Sufi, A.. “Control Rights and Capital Structure: An Empirical Investigation.” Journal of Finance, 64 (2009a), 1657–1695.Google Scholar
Roberts, M., and Sufi, A.. “Renegotiation of Financial Contracts: Evidence from Private Credit Agreements.” Journal of Financial Economics, 93 (2009b), 159–184.Google Scholar
Shleifer, A., and Vishny, R. W.. “Liquidation Values and Debt Capacity: A Market Equilibrium Approach.” Journal of Finance, 47 (1992), 1343–1366.Google Scholar
Strebulaev, I. A., and Yang, B.. “The Mystery of Zero-Leverage Firms.” Journal of Financial Economics, 109 (2013), 1–23.Google Scholar
Viswanath , P. V.“Strategic Considerations, the Pecking Order Hypothesis, and Market Reactions to Equity Financing.” Journal of Financial and Quantitative Analysis, 28 (1993), 213–234.Google Scholar