Debt Financing under Asymmetric Information

  • Author(s): GAUTAM GOSWAMI, THOMAS NOE, MICHAEL REBELLO
  • Published: Apr 30, 2012
  • Pages: 633-659
  • DOI: 10.1111/j.1540-6261.1995.tb04798.x

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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