Asymmetric Information and the Pecking Order

Diego Garcia, Dirk Hackbarth, Paolo Fulghieri
2012 Social Science Research Network  
In this paper we revisit the pecking-order theory of Myers and Majluf (1984) in a real options framework, where asymmetric information is the only contracting friction. We show that when insiders are better informed about the assets in place of the firm, relative to the new growth opportunities, equity financing can dominate (i.e., be less dilutive than) debt financing, creating a pecking (dis)order. We find that equity is more likely to dominate debt for younger firms that have larger
more » ... t needs, and with riskier, more valuable growth opportunities. Thus, our model can explain why highgrowth firms may prefer equity over debt, and then switch to debt financing as they mature. Finally, we study the optimal security design problem, and we provide conditions for which convertible debt and warrants emerge as optimal securities. * We would like to thank
doi:10.2139/ssrn.2024666 fatcat:glrb65joy5eibmuncdyn5ijcsi