Order of preference of debts under asymmetric information

Abstract

The purpose of this article is to investigate the debt hierarchy adopted by French companies in the context of asymmetric information. In other words, we identify the hierarchy between the three most used forms of debt that best describes the debt behaviors of French companies. The study relies on the ordered probit regression to identify the hierarchy that best describes the debt behaviors of a sample of 121 non-financial firms listed on the Euronext Paris stock exchange. Next, we perform panel-data regressions to investigate the impact of the financial crisis on debt behaviors. The empirical results show that French companies listed on the SBF 250 follow the hierarchy Bank debt, Bond debt, Convertible bonds. This hierarchy is explained primarily by asymmetric information. Other variables that explain the adoption of this hierarchy include the size, default risk, deficit and R&D expenditures of the company. At a time of crisis, despite the strong asymmetric information, the debt hierarchy is modified. To the best of our knowledge, this article constitutes the first study that addresses the existence of a hierarchy between three types of debt: bank debt, bond debt, and convertible bonds. Hence, it extends the previous research on capital structure and provides new managerial insights.