Journal ArticleDOI
Capital structure and signaling game equilibria
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In this article, the authors model the financing decisions of a firm as a sequential signaling game and show that when insiders have perfect information regarding the firm's future case flows, the application of'refinements' to the set of admissible equilibria leads to the dominance of debt over equity financing.Abstract:
In this article we model the financing decisions of a firm as a sequential signaling game. We prove that, when insiders have perfect information regarding the firm's future case flows, the application of 'refinements' to the set of admissible equilibria leads to the dominance of debt over equity financing. However, we show that when insiders observe the firm's cash flows imperfectly, there may exist sequential equilibria in which this 'pecking order' breaks down and some firms strictly prefer equity to debt financing. We also prove that, despite the breakdown of the pecking order, the announcement effect of equity financing will be negative relative to debt financing.read more
Citations
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The Theory of Capital Structure
Milton Harris,Artur Raviv +1 more
TL;DR: In this article, a survey of capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations is presented, with a brief overview of the papers surveyed and their relation to each other.
Journal ArticleDOI
Capital Structure Decisions: Which Factors Are Reliably Important?
Murray Z. Frank,Vidhan K. Goyal +1 more
TL;DR: This article examined the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003 and found that the most reliable factors for explaining market leverage are: median industry leverage, market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+).
Journal ArticleDOI
Timing, investment opportunities, managerial discretion, and the security issue decision
TL;DR: The authors investigated the ability of the pecking-order model, the agency model, and the timing model to explain firms' decisions whether to issue debt or equity, the shock price reaction to their decisions and their actions afterward.
Journal ArticleDOI
Trade-Off and Pecking Order Theories of Debt
TL;DR: Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts have all been advocated as major explanations for the corporate use of debt financing as mentioned in this paper, and these ideas have often been synthesized into the trade-off theory and the pecking order theory of leverage.
Journal ArticleDOI
Silver Signals: Twenty-Five Years of Screening and Signaling
TL;DR: The theory of market signaling and screening is a cornerstone of the new economics of information as discussed by the authors, and it has been used extensively in industrial organization, labor, and finance, among others.
References
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Journal ArticleDOI
The Market for “Lemons”: Quality Uncertainty and the Market Mechanism
TL;DR: In this paper, the authors present a struggling attempt to give structure to the statement: "Business in under-developed countries is difficult"; in particular, a structure is given for determining the economic costs of dishonesty.
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Corporate financing and investment decisions when firms have information that investors do not have
TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.
Book
Theory of rational option pricing
TL;DR: In this paper, the authors deduced a set of restrictions on option pricing formulas from the assumption that investors prefer more to less, which are necessary conditions for a formula to be consistent with a rational pricing theory.
Journal ArticleDOI
The determination of financial structure: the incentive-signalling approach
TL;DR: In this paper, the authors show that if managers possess inside information about the activities of firms, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated.
Journal ArticleDOI
Signaling Games and Stable Equilibria
In-Koo Cho,David M. Kreps +1 more
TL;DR: In this paper, the authors present a number of formal restrictions of this sort, investigate their behavior in specific examples, and relate these restrictions to Kohlberg and Mertens' notion of stability.