| In my thesis I study the reasons why a firm would issue equity and not debt in an asymmetric information setting. I investigate both theoretically and empirically the adverse selection costs associated with debt. In the Chapter 1 of the dissertation, I use a dynamic setting in which the degree of asymmetric information is changing over time and have important implications for the financing strategies of the firm. In Chapter 2, I investigate the problem in a single period setting where there is also asymmetric information about risk.;Chapter 1 proposes a model of financing decisions in an environment where asymmetric information changes through time. I identify a novel cost of debt that arises in this dynamic setting. Whereas in a one period model, debt is always preferred to equity because it is less sensitive to the private information managers have, with multiple overlapping investment projects, debt issues today make future security issues more sensitive to the degree of asymmetric information in the issuance period. I use the dispersion of analyst forecasts for different horizons to proxy for current and future asymmetric information and examine the financing of a large panel of US firms. I find that future adverse selection costs affect negatively the debt component of new external financing. This evidence is consistent with the prediction of my model that companies try to minimize adverse selection costs intertemporally.;Chapter 2 argues that Myers' (1984) pecking order hypothesis is a special case that applies when there is no asymmetric information about risk so that there is no adverse selection cost of debt. As soon as outside investors are imperfectly informed about risk, debt can be mispriced and firms may prefer to issue equity. Using a large unbalanced panel of publicly traded US firms, I present evidence (i) that there is a general adverse selection logic of capital structure decisions in which firms issue more equity and less debt if risk matters more and (ii) that the standard pecking order works well when risk does not matter, irrespective of firms' size, market-to-book ratio, tangibility or the time period. I consider different proxies for asymmetric information about risk, e.g. the month-to month 'variation of firms' asset volatilities, the variation of implied volatilities obtained from option prices, the level of recent asset volatility or the impact of credit ratings, and find that our results are robust. Other motives for issuing equity such as debt capacity constraints, market timing or tradeoff considerations do not appear to drive my findings. |
