Tests of a Signaling Hypothesis: The Choice between Fixed- and Adjustable-Rate Debt
Review of Financial Studies
1995
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 \ \rm 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 \ \rm percent. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.
- DOI
- 10.1093/rfs/8.3.605
- Volume
- 8 (3)
- Pages
- 605-636
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref