Research On Corporate Financing Under Asymmetric Information

Linking capital structure to risk has been difficult in the past, although risk playsimportant role in corporate financing. This paper try to show how inside informationabout value and risk impacts on the firm leverage. On the other hand, we considerresolution of the information asymmetry about the riskiness of the returns byapplication of hybrid financing instrument----convertible debt. The dissertationconsists of two sections: (1) Research on the impact of the information asymmetryabout the risk on leverage by both in theory and empiricism. (2) Research onasymmetric financing and financing with convertibles by both in theory andempiricism. The contents in detail as follows:1. By empirical research and theory study, the important role of informationasymmetry about the risk playing in the financing decision of Chinese listedcompanies is disclosed and verified. It also resolves the puzzle of equity financingpreference in Chinese listed companies and presents a simple unifying logic to theseemingly asymmetric information literature on firms' capital structure. The papershows risk is an aspect missing in the traditional pecking order and the reverseconclusion can be obtained if there is only asymmetric information about the risk offirms' future investments. We find robust and economically empirically support forthe adverse selection logic that conditions on risk. The results do not appear to bedriven by debt capacity concerns, market timing or the omission of conventionaldeterminants of leverage.2. Since the above conclusions of the important role of asymmetric information aboutthe risk of, it's necessary to do research on convertible bonds which can be used tosolve the problem caused by asymmetric information on risk. So in the second partthe paper, we studied the costless signaling equilibrium of convertible financing basedon the research results of Brennan and Kraus (1987). By considering the factors ofcost and information transparency, the paper show that not only that the problemcaused by asymmetric information on risk can be solved, but also the financingefficiency can be improved and the financing cost can be mitigated.3. We do empirical study on Chinese listed companies' characteristics, conversionprobability and convertible bonds financing decisions. The relationship of theissuance of convertible bonds with the information asymmetry about the risk is alsostudied. The convertible bonds are classified according to conversion probability, i.e.debt-like, hedge-like, and equity-like convertible bonds. Five empirical are performedunder Variance Test, T test, Mann-Whitney U Test, Logistic Model and Tobit Modelto characterize how issuers should design convertible bonds to efficiently mitigatespecific debt-and equity-related costs of external finance.