Information Asymmetry, Leverage Deviation, and Leverage Adjustment Speed

Abstract

Manuscript type: Research paper
Research aims: This paper aims to examine whether firms’ leverage deviation (i.e., actual leverage minus target leverage) and leverage adjustment speed are influenced by information asymmetry. Design/Methodology/Approach: This paper uses archival data retrieved from firms listed on the Tehran Stock Exchange from 2004 to 2017. The static and dynamic panel data approaches are used for analysis.
Research findings: Results show that an increase in information asymmetry increases firms’ leverage deviation. Results also indicate that firms with a higher (lower) level of information asymmetry tend to adjust their actual leverage towards the target, slower (faster) than that of other firms. These results are robust when using different sample periods, alternative set of leverage determinants and various estimation methods.
Theoretical contribution/Originality: This study investigates the effect of information asymmetry on leverage deviation and leverage adjustment speed in an emerging market. The results offer insights into the theoretical framework showing the relationship between the transparency of the business environment and capital structure. Practitioner/Policy implication: The result derived from the current study should be of interest to board of directors and policymakers. The findings are significant because more transparent firms may be more successful in achieving the optimal leverage, consequently low-ering the capital cost.
Research limitation/Implications: One limitation of the study is that the measures used for information asymmetry are based on the bid–ask spread, and the probability of informed trading. These measures may not completely reflect all of the information asymmetry among market participants. Future research could address this limitation by employing alternative proxies for information asymmetry.
Keywords Information Asymmetry, Leverage Adjustment Speed, Leverage Deviation
JEL Classification: G32, M4