Information asymmetry and equity issue decision of low-leverage firms

Abstract

Purpose The purpose of this paper is to investigate the role of information asymmetry in the equity issue decision of two categories of Indian firms with distinct levels of information asymmetry – levered firms and unlevered firms. Design/methodology/approach This paper proposes a novel empirical approach to compare these two categories of firms. Levered firms exposed to the debt markets are under the scrutiny of lenders, reducing their information asymmetry problems. On the other hand, unlevered firms, which are smaller firms with fewer tangible assets and no credit history suffers more information problems. The authors use a propensity score matching method to identify firms that share similar firm-specific characteristics in these groups and compare equity issues to analyze the impact of information asymmetry. Findings The results show that information asymmetry plays a key role in the equity issue decision of Indian firms. Additionally, the authors find that the trends and characteristics of low-leverage (LL) firms in India are comparable to the LL from developed economies, which is consistent with the findings that they face more information problems. Originality/value Unlike the conventional approach of using proxy variables to capture information asymmetry, this study uses a novel framework where the authors compare the equity issue decision of similar firms in two categories with different degrees of information asymmetry.

Asset tangibility, information asymmetries and intangibles as determinants of family firms leverage

“…Investment in tangible assets is not enough to increase debt level. This result runs counter to the findings of an abundant empirical literature (e.g., Myers 1977 ; Myers and Majluf 1984 ; Williamson 1988 ; Frank and Goyal 2009 ; Sony and Bhaduri 2018 ; Danso et al 2019 ), although other previous studies have pointed in this direction (e.g., Esperança et al 2003 ). There will always be a risk that an increase in the relative weight of tangible assets on the balance sheet may be due to the immobilization of resources in tangible assets unrelated to the business (speculative investments or non-productive assets acquired for tax purposes).…”

“…This reduction in perceived risk in the supply of capital would help firms that disclose more information of higher quality through these channels to secure more financing at a lower cost (Larrán and García-Mecca 2004 : 82). Finance theories have attributed the utmost importance to the nature of tangible assets given their potential collateral value, and the guarantee they thus offer to external providers of capital; this is the case both at the theoretical level (Stiglitz and Weiss 1981 ; Myers 1984 ; Myers and Majluf 1984 ) and in the empirical evidence on the managerial company (Frank and Goyal 2009 ; Sony and Bhaduri 2018 ; Danso et al 2019 ). Conversely, the same theories have downplayed the collateral value of intangibles because they have low residual value and are difficult to divest (Long and Malitz 1985 ; Gonzalez and González 2008 : Frank and Goyal 2009 ; Campello and Giambona 2011 ).…”

Financial Crisis Effect on Latin American Companies’ Debts

“…The ones that stand out the most are: tradeoff, pecking order, agency and its costs, informational asymmetry, moral hazard and adverse selection and signaling. However, they do little to discriminate between bank and non-bank debt options (Ross, 1977;Myers and Majluf, 1984;Ardalan, 2017;Sony and Bhaduri, 2018;Nicodano and Regis, 2019).…”

Internal or External Financing: New Evidence on Investor Reaction in Indonesian Manufacturing Firms

“…Meanwhile, firms that paid more dividends were more likely to use external financing than loans (Adedeji, 1998;Baskin, 1989;Qureshi, 2009;Tong & Green, 2005). Moreover, when information asymmetry was low, firms tended to issue equity (Autore & Kovacs, 2010;Sony & Bhaduri, 2018), or when firms were over-levered and experienced severe financial distress, issuing equity was the best choice for restructuring and adjusting their optimum leverage (Asad, Gulzar, Bangassa, & Khan, 2020;Kim, Ko, & Wang, 2019). However, some studies had provided evidence that highgrowth and younger firms tended to choose equity over debt, switching to debt when they reached maturity (Fulghieri, Garcia, & Hackbarth, 2020).…”