How do firms finance their investments? The relative importance of equity issuance and debt contracting costs

    Authors

    V. A. Gatchev; P. A. Spindt;V. Tarhan

    Comments

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    Abbreviated Journal Title

    J. Corp. Financ.

    Keywords

    Debt financing; Equity financing; Issue costs; CAPITAL STRUCTURE; CORPORATE-DEBT; SECURITY DESIGN; AGENCY COSTS; INFORMATION; DETERMINANTS; COMPETITION; DECISIONS; MATURITY; ISSUES; Business, Finance

    Abstract

    This paper examines the financing decisions of firms in response to changes in investments and profits. We find that information frictions play important roles in firms' financing decisions. However, we find no evidence that asymmetric information about the value of a firm's assets causes equity to be used only as a last resort. Indeed equity is the predominant source of finance in situations, such as profit shortfalls, investment in intangible assets, and internally generated growth opportunities, where informational asymmetries and agency costs are likely to be high. We also find that firms respond asymmetrically to positive and negative profit shocks. In financing fixed assets, high asymmetric information firms use more short-term debt and less long-term debt, whereas firms with high potential agency problems use significantly more equity and less long-term debt and cash. (C) 2008 Elsevier B.V. All rights reserved.

    Journal Title

    Journal of Corporate Finance

    Volume

    15

    Issue/Number

    2

    Publication Date

    1-1-2009

    Document Type

    Article

    Language

    English

    First Page

    179

    Last Page

    195

    WOS Identifier

    WOS:000264183200001

    ISSN

    0929-1199

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