The Quarterly Journal of Economics · 1987 · 904 citations · 3 references
Social SciencesEconomicsFinanceAsset PricingCorporate FinanceFinancial EconomicsAsymmetric InformationCapital MarketsCapital Structure TheoryInformation AsymmetryInformation Asymmetry In MarketsInformation EconomicsAsset Pricing Under Information AsymmetryBorrower-lender Information AsymmetryEquilibriumInformation Asymmetry EffectsOverinvestment ProblemUnderinvestmentUnderinvestment Problem
The paper challenges conventional views by contrasting its findings with the Stiglitz‑Weiss model. The study finds that asymmetric information causes lenders to overinvest, that higher interest rates can correct this, and that debt is the equilibrium financing method under these conditions while equity dominates under the Stiglitz‑Weiss framework.
This paper shows that under plausible assumptions, the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level. Raising the rate of interest above the free market level will restore optimality. This conflicts with generally held views and is contrasted with the Stiglitz-Weiss model. It is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance. However, under the Stiglitz-Weiss assumptions, used to derive an underinvestment result, equity is shown to be the equilibrium method of finance.
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Credit Rationing in Markets with Imperfect Information
Joseph E. Stiglitz, Andrew Weiss · American Economic Review · 1981 · 12.9K citations · Full text