Correcting for asymmetry of information and debt capacity on capital structure empirical tests: Evidence from Europe

Abstract

In this study, we examine the performance of the two competing theories of capital structure. We test the theories on sub-samples of firms that are expected to suffer from high asymmetry of information and that are believed to have enough debt capacity. To group the firms we have created two artificial indexes measuring asymmetric information and debt capacity. Present results show that the pecking order theory performs better when tested over the group of companies facing the highest level of asymmetric information. When the asymmetry of information is mixed, the above results are no longer significant. © 2009 Asian Network for Scientific Information.