Journal of Financial and Quantitative Analysis Vol. 48 No. 3 2013
Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes
Abstract
Asymmetric information models suggest that a borrower’s choice of debt maturity depends on its private information about its default probabilities, that is, borrowers with favorable information prefer short-term debt while those with unfavorable information prefer long-term debt. We test this implication by tracing the evolution of debt issuers’ default risk following debt issuances. We find that short-term debt issuance leads to a decline inborrowers’ asset volatility and an increase in their distance to default. The opposite is true for long-term debt issues. The results suggest that borrowers’ private information about their default risk is an important determinant of their debt maturity choices.
- DOI
- 10.1017/s0022109013000240
- Volume
- 48
- Issue
- 3
- Pages
- 789-817
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex