Asymmetric Information, Debt Capacity, and Capital Structure

A theory of capital structure in which costs associated with asymmetric information are the sole friction is used to present a new perspective on the standard pecking order theory. In the model, both the amount of debt and the restrictiveness of the associated debt covenants are considered to be part of the debt structure, allowing a more complete characterization of the capital structure to be examined. Leverage choice, the restrictiveness of the associated debt covenants, and the renegotiation of the covenants are examined and empirical implications are developed