Screening, Market Signalling, and Capital Structure Theory

WAYNE L. LEE; ANJAN V. THAKOR; GAUTAM VORA

doi:10.1111/j.1540-6261.1983.tb03837.x

Screening, Market Signalling, and Capital Structure Theory

WAYNE L. LEE
, ANJAN V. THAKOR
, GAUTAM VORA

Research output: Contribution to journal › Article › peer-review

14 Scopus citations

Abstract

This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approaches. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's a priori imperfectly known earnings distribution and use this information in specifying a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt‐equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution. 1983 The American Finance Association

Original language	English
Pages (from-to)	1507-1518
Number of pages	12
Journal	The Journal of Finance
Volume	38
Issue number	5
DOIs	https://doi.org/10.1111/j.1540-6261.1983.tb03837.x
State	Published - Dec 1983

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AB - This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approaches. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's a priori imperfectly known earnings distribution and use this information in specifying a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt‐equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution. 1983 The American Finance Association

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Screening, Market Signalling, and Capital Structure Theory

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