Capital Structure, Information Acquisition and Investment Decisions in an Industry Equilibrium

Vojislav Maksimovic, Alexander Stomper, Josef Zechner

Publication: Scientific journalJournal articlepeer-review

Abstract

This paper analyzes the relationship between a firm''s capital structure and its information acquisition prior to capital budgeting decisions. It is found that low-growth industries can sustain a large number of levered firms. In these industries, leverage is negatively related to a firm''s incentive to acquire information during the capital budgeting process. In contrast, high-growth industries only sustain a small number of levered firms. In these industries, levered firms acquire more information than all-equity financed firms. The model yields empirical predictions regarding the effects of leverage on the expected amount and the volatility of corporate investment. While leverage does not affect firm value, highly levered firms generate a more volatile cash flow than firms with low debt levels.
Original languageEnglish
Pages (from-to)251 - 271
JournalEuropean Finance Review
Volume2
Issue number3
DOIs
Publication statusPublished - 1999

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