Review of Financial Studies Vol. 8 No. 3 1995
Tests of a Signaling Hypothesis: The Choice between Fixed- and Adjustable- Rate Debt
Abstract
[We develop a model wherein the choice between adjustable- and fixed-rate debt can serve as a signal of firm quality. The nature of the signal depends on expected inflation volatility relative to other risk parameters. Evidence from a matched sample of debt announcements over the period 1978 to 1986 shows a difference of -2.05 percent between stock price reactions to adjustable rate and fixed rate announcements when expected inflation volatility is above an estimated threshold. Below this threshold, the difference is +0.98 percent. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.]
- Volume
- 8
- Issue
- 3
- Pages
- 605-636
- Sources
- bibtex:phds-export.bib