Corporate Finance

pooja923
Good Student
Posts: 28
Joined: Fri Mar 11, 2016 11:38 am

Corporate Finance

Postby pooja923 » Tue Feb 21, 2017 9:46 am

When information asymmetry is less, implies gap between the management and investors are less; and thus the company seems to be working in an adequate manner. So both debt and equity shall be easily available to the company. Agency cost shall be low . So why the use of debt in such cases are lower?

edupristine
Finance Junkie
Posts: 747
Joined: Wed Apr 09, 2014 6:28 am

Re: Corporate Finance

Postby edupristine » Fri Feb 24, 2017 9:10 am

Hi Pooja,

When information asymmetry is less, in this scenario PAR cost is less and the management is suppose to follow Pecking order theory i.e Management will always prefer retained earnings over debt and equity to fund their capital projects as agents (Managements) suppose to send positive signals to Principals (Shareholders).

I hope this helps!!


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