optimalcapitalstructureunderinformationasymmetry.docxVIP

Topic: Optimal capital structure under information asymmetryAbstract:In modern enterprise system, the ownership right separates from management right, which leads to the information asymmetry between shareholders and the manager. Finding optimal capital structure is an important content in operation and decision of the modern enterprise, but there are many factors affecting the optimal capital structure. So, how to determine the optimal capital structure under information asymmetry is an important problem that every modern enterprise has to face. This article argues that there is a relationship between a company’s optimal capital structure and those factors: operating profit margin, operating risk, borrowing interest rate, corporate income tax rate, and equity capital profitability. Moreover, based on these factors, a company can calculate its situation of operating with debt under information asymmetry, and investors can evaluate a company’s quality according to the risk tolerance level. Key words: information asymmetry; optimal capital structure; risk tolerance level.CatalogAbstract11 Introduction32 Literature Review43Research Questions153.1 the condition of operating with debt153.2 determinants of optimal capital structure153.3 financing preference154 Methodology164.1 Data collection164.2 Previous methodology174.3 Research methodology and variables185 Findings206 Conclusion and Suggestion337 Reference37Appendix391. Introduction:The definition of optimal capital structure is a company’s best debt-equity ratiothat minimizes the company’s total financing cost, and maximizes the shareholders’ profits, and the company’s market value (Modigliani and Miller, 1958, 262).“Under optimal capital structure, a company should balance the proportion of debt financing and equity financing and minimize thecompany’s cost of capital(Scott, 1976, 33-36)”. Usually, debt financing provides the lowest cost of capital because of its tax deductibility, but it will increase th