Information Asymmetry and Financing Decisions around the World

• In Event: Concurrent Session 1.4: Analysts and Other Market Intermediaries

Abstract

We study changes in financing decisions around changes in information asymmetry. Our hypotheses come from a key assumption of the pecking order theory ─ that information asymmetry affects a firm’s financing choices. Using IFRS as a setting with exogenous variation in information asymmetry, we hypothesize that post-IFRS firms: (i) will be more likely to seek external (as opposed to internal) financing and (ii) conditional on raising external capital, will be relatively more likely to issue equity than debt. Further, we also study predictions of the modified pecking order theory by studying changes in financing choices conditional on financial distress. Overall, our findings suggest that information asymmetry plays an important role in explaining financing policies around the world.

Authors

• Patricia Lucia Naranjo, Massachusetts Institute of Technology

• Daniel A Saavedra Lux, Massachusetts Institute of Technology

• Rodrigo Verdi, Massachusetts Institute of Technology