Question

5. Briefly describe the asymmetric information theory of capital structure. What are its implications for financial managers?

Answer 1

According to the theory of asymmetric information applied to capital structure. because managers know more about the value of the firm than external investors, managers tend to favor a capital structure that is higher on equity (internal financing) than debt (external financing).

This asymmetric information may also lead them to benefit old investros over new investors.