The Theory of Capital Structure

Harris, Milton; Raviv, Artur

doi:10.2307/2328697

Cited by 544 publications

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“…This is a formidable task, as capital structure (i.e., choice of debt-equity) constitutes a major puzzle in finance (see Harris and Raviv, 1991). Typically, financial institutions price their loans in an ad-hoc manner using credit rationing (in the form of initial loan-to-value (LTV) ratio and income ratio − see Jaffee and Stiglitz, 1990).…”

Section: Page 8 Of 40mentioning

confidence: 99%

Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?

Ebrahim

2008

SSRN Journal

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Section: Page 8 Of 40mentioning

confidence: 99%

Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?

Ebrahim

2008

SSRN Journal

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“…Harris & Raviv (1991), Myers (2003), Bohlin (1997), or Hart (2001 for overview articles. 20 Alternatively, we could assume that managers not only loose their benefits, but also suffer a punishment (in the spirit of Ross (1977), who introduces a 'bankruptcy penalty' for managers (see Ross (1977), p.28)), thus giving a negative boundary value.…”

Section: Management Claimmentioning

confidence: 99%

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Bank

Lawrenz

2005

SSRN Journal

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In this article, we consider the impact of asymmetric information between managers and investors on the optimal capital structure decision. This is done within a continuous-time framework, where the relevant state variable is given by the EBIT value of the firm; an approach taken by (2004) amongst others. Our setup differs in that we assume the EBIT to follow an Arithmetic Brownian motion, i.e. it can assume negative values. More importantly, we extend this framework in two directions: (i) We introduce a separate management claim. (ii) We introduce asymmetric information between managers and investors by assuming that claimants receive noisy signals, which they process according to rational expectation principles.Our results show, that managers always try to avoid debt, and that their optimal bankruptcy threshold is always lower, than the threshold set by equity holders. The introduction of asymmetric information changes the optimality conditions, and consequently the capital structure decision. It is shown, that the informational asymmetry can substantially lower the optimal leverage ratio, even without assuming that managers are entrenched.

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“…That is, we add informational spill-overs from stock prices to bond yields to aspects such as agency costs, corporate control considerations, or the tax-shielddefault tradeoff. In terms of the survey on capital structures by Harris and Raviv (1991), the present analysis is closest to models of asymmetric information, where the management's choice of a capital structure transmits insider information to outside investors. However, instead of a transfer of information from insiders to outsiders, the present analysis focuses on the transfer of information between outsiders, i.e., bond and stock investors.…”

Section: Introductionmentioning

confidence: 99%

Information Aggregation Through Stock Prices and the Cost of Capital

Gorelkina

Kuhle

2013

SSRN Journal

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This paper studies a firm's optimal capital structure in an environment, where the firm's stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose whether to acquire information and to trade the firm's equity. This induces a positive relation between the amount of equity issued and the stock price signal's precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist.

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The Theory of Capital Structure

Cited by 544 publications

References 0 publications

Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?

Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Information Aggregation Through Stock Prices and the Cost of Capital

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