Information Asymmetry about Investment Risk and Financing Choice

Mufaddal Baxamusa; Sunil Mohanty; Ramesh P. Rao

doi:10.1111/jbfa.12128

journal article Aug 18, 2015

Information Asymmetry about Investment Risk and Financing Choice

Mufaddal Baxamusa Sunil Mohanty Ramesh P. Rao

Journal of Business Finance & Accounting Vol. 42 No. 7-8 pp. 947-964 · Wiley

View at Publisher Save 10.1111/jbfa.12128

Abstract

AbstractThough it is generally accepted that information asymmetry has an impact on capital structure policy, the nature of the information asymmetry is not well understood. Recent theoretical work and empirical evidence suggests that financing choice depends upon the information asymmetry associated with the investment risk of the particular use of proceeds. Consistent with this view, using the sources and uses of funds framework, we find that equity is used to fund projects with greater information asymmetry about their risk such as research and development expenditure, while debt is used to fund investments with lower information asymmetry about their risk such as liquidity enhancement.

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Details

Published: Aug 18, 2015
Vol/Issue: 42(7-8)
Pages: 947-964
License: View

Authors

Cite This Article

Mufaddal Baxamusa, Sunil Mohanty, Ramesh P. Rao (2015). Information Asymmetry about Investment Risk and Financing Choice. Journal of Business Finance & Accounting, 42(7-8), 947-964. https://doi.org/10.1111/jbfa.12128

Information Asymmetry about Investment Risk and Financing Choice

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