How Do Firms Finance Their Investments? The Relative Importance Of Equity Issuance And Debt Contracting Costs
Source: University of Central Florida
This paper examines how information and agency costs that are reflected in asset characteristics and firm characteristics affect firms' incremental financing decisions. Unlike earlier literature, the authors' interest is not in testing a particular theory of financing but rather in understanding the role of information and agency costs on the financing decisions of firms. The authors estimate a multi-equation system whose dependent variables are financing sources and whose independent variables are factors affecting the need for finance. They find strong evidence that asset and firm characteristics that reflect information and agency costs play an important role in financing decisions.