Journal of Financial and Quantitative Analysis Vol. 59 No. 8 2024
Capital Structure with Information about the Upside and the Downside
Abstract
I introduce two dimensions of uncertainty, about the upside and the downside of an asset, in a model of asset valuation under asymmetric information. This justifies capital structures with equity and risky debt for information revelation purposes. However, a capital structure with only one information-sensitive security, equity, can be optimal when investors are less informed about the dimension that matters more for valuation. This is relevant for innovative firms with a large upside subject to strong information asymmetries, which often have abnormally low leverage, and for firms at an intermediate stage of their life cycle that do not issue risky debt.
- DOI
- 10.1017/s0022109023001278
- Volume
- 59
- Issue
- 8
- Pages
- 3921-3958
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex