Financial Signaling and Information Asymmetries of Debt Vs. Equity in Emerging and Transitional Economies: An Application of EBA -Approach

Abstract

This paper examines the sensitivity and validity of debt signaling hypothesis by application of extreme bound analysis is rare in this field. Better and accurate coefficients regarding debt vs. equity could be attained by this technique. Further, the study based on capital structure theories which explore Asset Tangibility (AT), Profitability (PF), Size (SZ), Growth (GR), Investment Growth Opportunities (IG) and Size (SZ), Bankruptcy Risk (BR, Agency Cost (AC), Uniqueness (UN), Industry Classification (IC) Liquidity Position (LP), Financial Flexibility (FF), Transaction Cost (TC), Timing Effect (TE), Relative Tax Effect (RTE), And Free Cash Flows (FCF). The choice of sample covered all sectoral companies listed in Pakistan Stock Exchange for the period from 2012 to 2022. The analysis reveals that Agency Cost (AC), Liquidity (CR), Investment Growth Opportunity (IGO), Financial Flexibility (FF), Free Cash Flows (FCF), Relative Tax Effect (RTE) And Interest Rate (IR) reflecting the robustness and sensitivity of Debt Vs. Equity. The particular research is very helpful for researchers, fund managers, financial analysts and investors to important investment decisions. The empirical findings are may also have unique importance to manage the risk of firms. It should also imply to practice the good management theories for optimal capital structure and ultimately maximization of the wealth.