Debt vs. Equity and Asymmetric Information: A Review

  1. Linda Schmid Klein1,
  2. Thomas J. O’Brien1,
  3. Stephen R. Peters2

Article first published online: 7 JAN 2003

DOI: 10.1111/1540-6288.00017

Issue

Financial Review

Financial Review

Volume 37, Issue 3, pages 317–349, August 2002

Additional Information

How to Cite

Klein, L. S., O’Brien, T. J. and Peters, S. R. (2002), Debt vs. Equity and Asymmetric Information: A Review. Financial Review, 37: 317–349. doi: 10.1111/1540-6288.00017

Author Information

  1. 1

    University of Connecticut,

  2. 2

    Kansas State University

* Linda Schmid Klein Department of Finance, University of Connecticut, 2100 Hillside Rd., Storrs, CT 06269–1041; Phone: (860) 486–2765; Fax: (860) 486–0634lin@business.uconn.edu

Publication History

  1. Issue published online: 7 JAN 2003
  2. Article first published online: 7 JAN 2003

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Keywords:

  • capital structure;
  • asymmetric information;
  • pecking order hypothesis;
  • timing hypothesis

Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers–Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.

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