Debt-equity choice as a signal of earnings profile over time

Miglo, A

Abstract

This paper analyzes 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.

Citation

Miglo, A. (2007). Debt-equity choice as a signal of earnings profile over time. Quarterly Review of Economics and Finance, 47(1), 69-93. https://doi.org/10.1016/j.qref.2006.07.001

• Journal Article Type: Article
• Acceptance Date: Jul 15, 2006
• Online Publication Date: Sep 7, 2006
• Publication Date: Mar 1, 2007
• Deposit Date: May 26, 2021
• Journal: Quarterly Review of Economics and Finance
• Print ISSN: 1062-9769
• Publisher: Elsevier
• Volume: 47
• Issue: 1
• Pages: 69-93
• DOI: https://doi.org/10.1016/j.qref.2006.07.001
• Publisher URL: https://doi.org/10.1016/j.qref.2006.07.001
• Related Public URLs: http://www.elsevier.com/wps/product/cws_home/620167/description
• Additional Information: Access Information : The Accepted Manuscript of this article is available Open Access at http://www.open-access.bcu.ac.uk/6210/1/Guelphworkingpaper.pdf