Rights versus underwritten offerings: an asymmetric information approach

Article Abstract:

A model of rational expectations from investments in capital markets, developed on the assumption of asymmetric information available to investors and firms needing equity, allows the identification of three forms of equity financing: standby rights offers, which are generally associated with high-quality firms; subscription prices for uninsured rights offers; and fully underwritten issues, frequently associated with lower-quality firms. The choice of method in raising equity capital is dependent upon the quality of the firm and the information available to the average investor. In the U.S., 83 percent of equity financings for the period from 1971 to 1975 were fully underwritten. This percentage is high in comparison to European investment activities, primarily due to the amount of information available to potential investors.

Management

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Dynamic capital structure choice: theory and tests

Article Abstract:

This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. The theory provides the optimal dynamic recapitalization policy as a function of firm-specific characteristics. We find that even small recapitalization costs lead to wide swings in a firm's debt ratio over time. Rather than static leverage measures, we use the observed debt ratio range of a firm as an empirical measure of capital structure relevance. The results of empirical tests relating firms' debt ratio ranges to firm-specific features strongly support the theoretical model of relevant capital structure choice in a dynamic setting. (Reprinted by permission of the publisher.)

Debt, Corporate reorganizations

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Asymmetric information and risky debt maturity choice

Article Abstract:

When corporate insiders are better informed than potential investors, they will choose to offer securities that are overvalued by the capital market. Consequently, investors may attempt to assess the insiders' information, based on the type of security offered and the firm's financial structure. For example, the maturity choice will frequently indicate to the savvy investor a firm's internal debt structure. A model is developed that, among other things, indicates firms in good financial position will tend to offer short-term obligations on capital and equity markets.

Risk management, Bonds, Bonds (Securities), Financial research

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