The Role of Information Asymmetry in Financing Methods

There is no doubt that new investments are the cornerstone of progress and competition in today’s world. Different financing instruments are em-ployed to secure the funds for these investments. The most common fi-nancing methods in Iran are debt and equity financing. Some investors, including corporate insiders, have access to private information. Themore private the information, the more will be the bid/ask spread between in-vestors, thus reducing the returns of those with no access to such informa-tion. Therefore, information asymmetry is expected to affect the funding of investments. The purpose of this study was to examine the relationship between information asymmetry and financing methods (debt and equity financing). The population consists of all the firms listed on the Tehran Stock Exchange that have been operating during the period 2006–2010. Totally, 61 firms were selected as sample using targeted sampling. The re-sults showed that there is no significant relationship between information asymmetry and debt financing; however, there was a significant positive relationship between information asymmetry and equity financing. Key Words: information asymmetry; debt financing; equity financing jel Classification: d53; e44; c5