Theories of Corporate Debt Policy: A Synthesis

Chen, Andrew H.; Kim, E. Han

doi:10.1111/j.1540-6261.1979.tb02098.x

Cited by 61 publications

(16 citation statements)

References 36 publications

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“…In another context Leland and Pyle [15] have employed such a signal for owner‐managers. Whatever the merits of these arguments (and these positions are not immune to criticism, see Chen and Kim [6] and Bhattacharya [3]) we assume that such perfect signals do not exist. Indeed, if they did there would be no room for the present analysis and no room for intermediaries as information producers.…”

Section: Imperfect Information and The Values Of Firms: The Case mentioning

confidence: 99%

Information Production, Market Signalling, and the Theory of Financial Intermediation

Campbell¹,

Kracaw

1980

The Journal of Finance

364

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Section: Imperfect Information and The Values Of Firms: The Case mentioning

confidence: 99%

Information Production, Market Signalling, and the Theory of Financial Intermediation

Campbell¹,

Kracaw

1980

The Journal of Finance

364

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“…When perfect market assumptions are relaxed, different types of analytical issues arise. First, the existence of market imperfections implies that financing decisions may affect the value of the firm and that, as a result, firms may have long run target financial structures which are influenced by factors such as corporate and personal taxes, bankruptcy costs, and agency related costs [2, 4, 8, 11, 16, 17, 2223, 24]. Second, market imperfections such as adjustment costs or constraints may lead firms not to adjust completely to these long run targets in every time period but instead to follow a pattern of partial adjustment.…”

Section: Introductionmentioning

confidence: 99%

Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study

Jalilvand¹,

Harris²

1984

The Journal of Finance

352

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This study of financing decisions by U.S. corporations examines the issuance of long term debt, issuance of short term debt, maintenance of corporate liquidity, issuance of new equity, and payment of dividends. Given costs and imperfections inherent in markets, a firm's financial behavior is characterized as partial adjustment to long run financial targets. Individual firm data are used so that speeds of adjustment are allowed to vary by company and over time. The results suggest that financial decisions are interdependent and that firm size, interest rate conditions, and stock price levels affect speeds of adjustment.THIS STUDY OF FINANCING DECISIONS by U.S. corporations examines the issuance of long term debt, short term debt and equity, the maintenance of corporate liquidity, and the payment of dividends. The firm's financial behavior is characterized as partial adjustment to long run financial targets, and individual firm data (1966)(1967)(1968)(1969)(1970)(1971)(1972)(1973)(1974)(1975)(1976)(1977)(1978) are used to estimate firm-specific, time varying speeds of adjustment. The results suggest that financial decisions are interdependent and that firm size, interest rate conditions, and stock price levels affect speeds of adjustment. Also, the estimated coefficients are more plausible than the very small (Taggart [28]) or very large (Spies [26]) values found in earlier studies. Section I of the paper introduces the general model. In Section II, a tractable empirical model is developed. Section III presents the data to be used in the study and discusses econometric issues. In Section IV, results and conclusions are offered. I. BackgroundThe corporation has long served as a major form for organizing economic activity. Such "survival value" must reflect benefits from the organizational and management structure designed to harness both real and financial resources. In large part, such value is derived from costs and imperfections inherent in markets: information asymmetries, transactions costs, real economies of scale or scope, forms of taxation, etc. (see Coase [5] and Williamson [29]). We thank Michael Brennan, Willard Carleton, Richard McEnally, and the participants in the finance workshops at the University of North Carolina at Chapel Hill and Concordia University for their helpful comments. 127 128 The Journal of FinanceOn the other hand, there exists an extensive literature in corporate finance that assumes a perfect market environment in which to analyze a firm's behavior.' One logical conclusion of many such perfect market analyses is that a firm's investment, financing, and dividend decisions are independent and thus can be analyzed separately.While such "perfect market" analysis provides useful insights into the behavior of corporations, it has the disturbing feature of denying, by assumption, many of the features ("imperfections") of financial and economic activity that give rise to corporations in the first place. This study postulates that the financial and dividend decisions of the corporation should...

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“…Jensen and Meckling [7] and Titman [20] use monitoring/bonding and liquidation costs, respectively, to derive optimal capital structure. A recent survey is provided by Chen and Kim [4].…”

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confidence: 99%

A Theory of Capital Structure Relevance under Imperfect Information

Heinkel¹

1982

The Journal of Finance

157

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Firms raise debt and equity capital to finance a positive net present value project in perfectly competitive capital markets; firm insiders know the function generating the random firm cash flow but potential capital suppliers do not. Taking into account the incentives of insiders to misrepresent their firm type, capital suppliers attempt to design financing mixes of debt and equity that eliminate the adverse incentives of insiders and correctly price securities. Necessary conditions for a costless separating equilibrium are developed to show that the amount of debt used by a firm is monotonically related to its unobservable true value. STIGLITZ [19] AND FAMA [5] DEMONSTRATE that the Modigliani-Miller [10] capital structure irrelevance theorem holds under a fairly general set of assumptions. One of these assumptions is that investor expectations of the returns of individual firms are independent of their capital structures. This paper introduces asymmetric information into an otherwise perfect, Modigliani-Miller world and develops a signaling equilibrium in which investor expectations about individual firms do depend upon the capital structures of the firms.'In existing equilibrium models of markets with asymmetric information, such as Spence's [17] labor market, Rothschild and Stiglitz's [15] insurance market, or Leland and Pyle's [9] financial structure model, the sellers of higher quality products (higher quality labor, better insurance risks, or more valuable securities) incur some deadweight loss, since buyers are unable to distinguish quality without a signal from the seller; to prevent low quality sellers from sending a misleading signal, the signal must be costly. This paper describes a costless signaling equilibrium, in which sellers incur no deadweight losses and are as well off as they would be in a world of symmetric information. This equilibrium is not subject to the instability problems which may exist in the costly signaling equilibria.2 * University of British Columbia, Canada. 'Other models have utilized other imperfections to demonstrate capital structure relevance. For example, Rubinstein [16] and Stiglitz [18] segment the market by tastes and beliefs, respectively, to develop debt/equity relevance. Many authors have used taxes and bankruptcy costs; Kraus and Litzenberger [8] is one example. Myers [11] combines moral hazard in firms' investment decisions with corporate taxes to show capital structure relevance. Jensen and Meckling [7] and Titman [20] use monitoring/bonding and liquidation costs, respectively, to derive optimal capital structure. A recent survey is provided by Chen and Kim [4].2 A costly signaling equilibrium may be unstable if there exists some pooling offer that is profitable to the buyer and that all sellers prefer to the signaling contracts. A pooling offer is a purchase offer at a single price corresponding to the price of the average quality product in the market; thus, in a 1141

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Theories of Corporate Debt Policy: A Synthesis

Cited by 61 publications

References 36 publications

Information Production, Market Signalling, and the Theory of Financial Intermediation

Information Production, Market Signalling, and the Theory of Financial Intermediation

Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study

A Theory of Capital Structure Relevance under Imperfect Information

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