A theory of capital structure, price impact, and long-run stock returns under heterogeneous beliefs

Onur Bayar, Thomas J. Chemmanur, Mark H. Liu

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We study an environment with short-sale constraints and heterogeneous beliefs among outsiders and between insiders and outsiders. Firm insiders choose between equity, debt, and convertible debt to raise external financing. We analyze two settings: one in which heterogeneous beliefs is the only market imperfection and another in which there are significant security issue and financial distress costs. Our model generates a pecking order of external financing different from asymmetric information models, and new predictions for capital structure, sequential tranching of securities, the price impact of security issues, and long-run stock returns. We also provide a new rationale for convertible debt issuance.

Original languageEnglish
Pages (from-to)258-320
Number of pages63
JournalReview of Corporate Finance Studies
Volume4
Issue number2
DOIs
StatePublished - Sep 2015

Bibliographical note

Publisher Copyright:
© The Author 2015. Published by Oxford University Press on behalf of The Society for Financial

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics

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