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On the Informativeness of External Equity and Debt

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  • Kazuhiko Mikami
  • Keizo Mizuno

Abstract

According to the pecking order hypothesis, firms¡¯ sources of finance can be ranked in order of preference as (i) internal equity, (ii) debt, and (iii) external equity. In reality, however, it is not unusual that a firm seeking funds for new investment issues common stock (i.e., external equity) even in a situation where the issuance of bonds or borrowing from the bank (i.e., debt) is also available. This paper focuses on the informational aspects of external equity and debt, and gives an explanation why firms occasionally prefer external equity to debt as a source of funds. Using a simple cheap-talk model, we show that external equity can be more informative to investors than debt, thus making external equity a more preferred source of financing than debt for entrepreneurs.

Suggested Citation

  • Kazuhiko Mikami & Keizo Mizuno, 2013. "On the Informativeness of External Equity and Debt," Journal of Business Administration Research, Journal of Business Administration Research, Sciedu Press, vol. 2(1), pages 58-65, April.
  • Handle: RePEc:jfr:jbar11:v:2:y:2013:i:1:p:58-65
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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