Leland and Pyle (1977) examine the effect of informational asymmetries

Leland and Pyle (1977) examine the effect of informational asymmetries on equilibrium corporate valuation and financial structure.

The authors develop a signaling model and work through a specific example, focusing on optimal debt levels under conditions of asymmetric information. In their signaling model, an entrepreneur seeks financing for a project whose true value is known only to him. Clearly, direct transfer of information to lenders is impossible. Information may, however, be transferred by a credible signal. Here, the signal is:
a. the entrepreneur’s willingness to include debt in the firm’s capital structure.
b. the willingness of the entrepreneur to invest in his own project.
c. the entrepreneur’s ability to attract private equity capital.
d. the entrepreneur’s expressed willingness to remain as a manager of the firm.

ANSWER

B