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Capital Structure with Information about the Upside and the Downside

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  • Chaigneau, Pierre

Abstract

We introduce two dimensions of uncertainty, about the upside and the downside of an asset, in a model of asset valuation under asymmetric information. This justifies capital structures with equity and risky debt for information revelation purposes. However, a capital structure with only one information-sensitive security, equity, can be optimal when investors are less informed about the dimension that matters more for valuation. This is relevant for innovative firms with a large upside subject to strong information asymmetries, which often have abnormally low leverage, and for firms at an intermediate stage of their life cycle that don't issue risky debt.

Suggested Citation

  • Chaigneau, Pierre, 2023. "Capital Structure with Information about the Upside and the Downside," MPRA Paper 121397, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:121397
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    More about this item

    Keywords

    capital structure; downside risk; security design; tranching; upside potential;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

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