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Information ratings and capital structure

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  • Pan, Lee-Hsien
  • Lin, Chien-Ting
  • Lee, Shih-Cheng
  • Ho, Kung-Cheng

Abstract

We examine the impact of information asymmetry on a firm's capital structure decisions with a unique information rating scheme that draws from 114 measures over five dimensions of information disclosures on each firm from 2006 to 2012. We find that a firm with high (low) information rating is related to low (high) debt financing and leverage. In particular, a firm that moves from the lowest to the highest information rating experiences a 7.8% reduction in firm leverage on average. This relationship is robust to firm characteristics, incentive conflicts, and the agreement theory of Dittmar and Thakor (2007). Our results suggest that information asymmetry is influential on a firm's pecking order behavior independent of these effects.

Suggested Citation

  • Pan, Lee-Hsien & Lin, Chien-Ting & Lee, Shih-Cheng & Ho, Kung-Cheng, 2015. "Information ratings and capital structure," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 17-32.
    • Handle: RePEc:eee:corfin:v:31:y:2015:i:c:p:17-32
    DOI: 10.1016/j.jcorpfin.2015.01.011
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    More about this item

    Keywords

    Information asymmetry; Capital structure; Information ratings; Pecking order theory; Incentive conflicts;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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