Impacts of information asymmetry on the capital structure of Brazilian publicly-traded firms

Abstract

Several theories try to explain what determines the financing policy firms adopt. One of the existent approaches, Pecking Order Theory, focuses on information asymmetry as an important determinant of the capital structure. In the present work, we try to analyze the central presumption of the referred theory and to verify if the information asymmetry influences the financing decisions of Brazilian open capital firms in the period 1997-2007. In order to do so, proxy variables are used for information asymmetry, besides control variables that represent firms' characteristics. Panel data analysis is the technique used. As the main result, it was found that companies considered to have the lowest degree of information asymmetry are higher leveraged than the others when analyzing the level of total debt. That result is contrary to the pecking order theory, where these companies would have the opportunity to raise resources by emitting shares, due to the low probability of occurring problems derived from information asymmetry. However, this result supports the expected alternative relation, where companies with lower asymmetric information make it easier for their debt holders to evaluate their risk, what could increase the credit offer, favoring the use of debt by reducing the adverse selection costs and increasing the debt capacity of these companies. In doing so, it becomes important to also analyze the role of the risk when establishing a hierarchy of preferences adopted by Brazilian firms regarding alternative financing sources.