The Review of Corporate Finance Studies Vol. 4 No. 2 2015
A Theory of Capital Structure, Price Impact, and Long-Run Stock Returns under Heterogeneous Beliefs
Abstract
We study an environment with short-sale constraints and heterogeneous beliefs among outsiders and between insiders and outsiders. Firm insiders choose between equity, debt, and convertible debt to raise external financing. We analyze two settings: one in which heterogeneous beliefs is the only market imperfection and another in which there are significant security issue and financial distress costs. Our model generates a pecking order of external financing different from asymmetric information models, and new predictions for capital structure, sequential tranching of securities, the price impact of security issues, and long-run stock returns. We also provide a new rationale for convertible debt issuance.
- DOI
- 10.1093/rcfs/cfv004
- Volume
- 4
- Issue
- 2
- Pages
- 258-320
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref