Information Asymmetry and Debt–Equity Choice: Evidence from an Emerging Market, India

Abstract

We examine the role of information asymmetry in the debt–equity choice decisions of firms from an important emerging market, India. Information problems are more severe in the emerging markets and we find strong evidence in favour of information asymmetry playing a key role in the capital structure decisions of Indian firms. Consistent with the pecking order model, we find that equity issues are lesser in number and firms facing fewer information problems issue equity. We use novel variables such as analyst coverage, analyst forecast surprise and dispersion to capture information asymmetry in the Indian market. JEL: G32