Why is it that the cost of aymmetric information increases as the proportion of equity in the capital structure increases?
This is in p.267 of Schwesers book 2.
I can see that higher equity mean a higher share of the company being held by equityholders, who have less information than management. But doesn that apply to debtholders as well?
Thanks
debtholders are protected by covenants created when the debt issuance happens. and they are protected also by the fact that in case of a bankruptcy - they are paid first. So lack of information would not hurt them as much as the equity holder - who pretty much gets paid nothing in case of a bankruptcy - and also has no other way than the various corporate governance features to find out how the company is doing.
Makes total sense. Thanks.
One more thing, on the same chapter, the last section refers to international factors impacting the firm`s capital structure Most of them, in my view, are not obvious nor explained in Schweser book.
Has anyone found a way to memorize those or take out some reasoning out of them?
Thanks!
Anyone?