Information Asymmetry and Capital Structure Around the World

This paper examines the relation between information asymmetry, capital structure and the cost of capital across countries, particularly focusing on how the relation is influenced by the various aspects of the institutional environment. Results show that firms with high levels of information asymmetry tend to use more debt capital but less long-term debt, possibly because of the differential impact of information asymmetry on the cost of different types of capital. Furthermore, the positive association between information asymmetry and market leverage is more pronounced in countries with developed banking sectors or with explicit bankruptcy codes, and less prominent in common-law countries and countries with sound law enforcement or with extensive disclosure practices.