Impact of Asymmetric Information on Capital Structure Decisions of Agriculture-Allied and Non-Financial Firms

Abstract

This study investigates the capital structure decisions in presence of asymmetric information. It attempts to capture the effect of asymmetric information on capital structure by utilizing the equity data of 280 firms listed at Pakistan Stock Exchange (PSX), comprising of 155 firms from agriculture-allied sectors and 125 firms from other non-financial sectors for 19 years from 2000 to 2018. This research finds that asymmetric information shows a significant impact on capital structure decisions of the firms and plays a significant but highly negative role in agriculture-allied firms as compared to those of other non-financial firms. The study concludes that asymmetric information prevails in manufacturing firms working in Pakistan. It further suggests that managers of the firms prefer debt instead of equity financing to mitigate the effect of asymmetric information