The purpose of this paper is to investigate the role of information asymmetry in the equity issue decision of two categories of Indian firms with distinct levels of information asymmetry – levered firms and unlevered firms.
This paper proposes a novel empirical approach to compare these two categories of firms. Levered firms exposed to the debt markets are under the scrutiny of lenders, reducing their information asymmetry problems. On the other hand, unlevered firms, which are smaller firms with fewer tangible assets and no credit history suffers more information problems. The authors use a propensity score matching method to identify firms that share similar firm-specific characteristics in these groups and compare equity issues to analyze the impact of information asymmetry.
The results show that information asymmetry plays a key role in the equity issue decision of Indian firms. Additionally, the authors find that the trends and characteristics of low-leverage (LL) firms in India are comparable to the LL from developed economies, which is consistent with the findings that they face more information problems.
Unlike the conventional approach of using proxy variables to capture information asymmetry, this study uses a novel framework where the authors compare the equity issue decision of similar firms in two categories with different degrees of information asymmetry.
