Information Asymmetry, Leverage Deviation, and Leverage Adjustment Speed

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Abbas Aflatooni
Mahdi Khazaei


Manuscript type: Research paper

Research aims: This paper examines whether the firms’ leverage deviation (i.e., actual leverage minus target leverage) and leverage adjustment speed are influenced by information asymmetry.

Design/Methodology/Approach: To achieve research goals, this paper uses archival data from firms listed in the Tehran Stock Exchange for the period of 2004-2017 and applies the static and dynamic panel data approach.

Research Findings: The research results show that an increase in information asymmetry increases the firms’ leverage deviation. Furthermore, results indicate that firms with a higher (lower) level of information asymmetry tend to adjust their actual leverage toward the target, slower (faster) than that of other firms. These results are robust to different sample periods, an alternative set of leverage determinants, and various estimation methods.

Theoretical contributions/Originality: This is the first study that investigates the effect of information asymmetry on leverage deviation and leverage adjustment speed. The outcome of this study is useful for policy implication in the context of financing decisions.

Keywords Information Asymmetry, Leverage Adjustment Speed, Leverage Deviation


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