Debt-Equity Choice as a Signal of Earnings Profile Over Time

Miglo, Anton (2007) Debt-Equity Choice as a Signal of Earnings Profile Over Time. Quarterly Review of Economics and Finance, 47 (1). pp. 69-93. ISSN 1062-9769

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Abstract

This paper analyzes the debt-equity choice for financing a two-stage investment when a firm's insiders have private information about the firm's expected earnings. When private information is one-dimensional (for example when short-term earnings are common knowledge while long-term earnings are private information) a separating equilibrium does not exist. When private information is two-dimensional a separating equilibrium may exist where firms with a higher rate of earnings growth issue debt and firms with a lower rate of earnings growth issue equity. This provides new insights into the issue of different kinds of securities by different types of firms under asymmetric information as well as the link between debt-equity choice and operating performance.

Item Type: Article
Subjects: L100 Economics
N100 Business studies
N200 Management studies
N300 Finance
Divisions: Faculty of Business, Law and Social Sciences > Birmingham City Business School > Dept. Accountancy and Finance
Depositing User: Anton Miglo
Date Deposited: 13 Aug 2018 07:44
Last Modified: 13 Aug 2018 07:44
URI: http://www.open-access.bcu.ac.uk/id/eprint/6210

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