Debt Financing under Asymmetric Information

  • Goswami G
  • Noe T
  • Rebello M
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Abstract

A study analyzes the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. The study shows 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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Goswami, G., Noe, T., & Rebello, M. (1995). Debt Financing under Asymmetric Information. The Journal of Finance, 50(2), 633. https://doi.org/10.2307/2329422

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