Does asymmetric information affect firm's financing decisions?
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 3 August 2021
Issue publication date: 14 November 2023
Abstract
Purpose
The authors examine the impact of asymmetric information on firm's financing decisions, the feedback effect of changes in capital structure on the level of asymmetric information, and the speed of adjustments in capital structure on its target leverage.
Design/methodology/approach
The authors extract the data on 280 non-financial firms listed in the Pakistan Stock Exchange (PSX) from the DataStream. The authors implement the generalized method of moments (GMM), complemented by the fixed effect model (FEM) to estimate the model coefficients.
Findings
The authors find that asymmetric information significantly affects the financing decisions; and that on average, firms adjust 26% of the total debt toward their target capital structure. The negative effect from the difference between the observed and target changes in leverage on asymmetric information confirms that capital structure changes act as a signal for future profitability and helps the management to lower its level of asymmetric information.
Originality/value
The findings offer fresh insight into the effect of asymmetric information on financing decisions, as well as the speed of adjustment of capital structure toward its target leverage, in the context of the firms working in emerging markets like Pakistan. To the authors’ best knowledge, this is the first study to investigate the impact of asymmetric information on financing decisions that incorporate firm's age, size and the global financial crises 2007–2008. The authors construct an asymmetric information index using both accounting and finance measures of asymmetry.
Keywords
Acknowledgements
Authors acknowledge the constructive feedback received from three anonymous referees, senior subject editor and editor-in-chief to improve the quality of paper. There is no funding related to this project.
Citation
Ahmad, M.M., Hunjra, A.I., Islam, F. and Zureigat, Q. (2023), "Does asymmetric information affect firm's financing decisions?", International Journal of Emerging Markets, Vol. 18 No. 9, pp. 2718-2734. https://doi.org/10.1108/IJOEM-01-2021-0086
Publisher
:Emerald Publishing Limited
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