Debt Maturity And Asymmetric Information
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Author | : Marco Espinosa-Vega |
Publisher | : INTERNATIONAL MONETARY FUND |
Total Pages | : 41 |
Release | : 2005-10-01 |
Genre | : |
ISBN | : 9781451862201 |
We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.
Author | : |
Publisher | : |
Total Pages | : 64 |
Release | : 2004 |
Genre | : Banks and banking |
ISBN | : |
"We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity"--Abstract.
Author | : Vidhan K. Goyal |
Publisher | : |
Total Pages | : 66 |
Release | : 2014 |
Genre | : |
ISBN | : |
Asymmetric information models suggest that a borrower's choice of debt maturity depends on its private information about its default probabilities, i.e., 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 in borrowers' 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.
Author | : Marco Sorge |
Publisher | : World Bank Publications |
Total Pages | : 43 |
Release | : 2007 |
Genre | : Access to Finance |
ISBN | : |
This paper provides new theoretical and empirical evidence suggesting that the quality of credit information may be a key element in explaining the maturity structure of corporate debt around the world. In markets with poor credit information and hence a high degree of uncertainty about borrower quality, the authors find suboptimal equilibria in which short-term contracts are preferred either as a hedge against uncertainty to limit losses in bad states (in the symmetric information case) or as a screening device to learn about borrower credit quality in the course of a repeated lending relationship (in the asymmetric information case). The results of the model are supported by the econometric analysis of panel data from both industrial and developing economies. The authors find that countries with better quality of credit information (for example, as a result of improvements in credit reporting systems or accounting standards) are characterized by a higher share of long-term debt as a proportion of total corporate debt ceteris paribus. The findings suggest that promoting institutions and policies to improve the quality of credit information is an important prerequisite for increasing access of firms to long-term finance.
Author | : Diego J. Perez |
Publisher | : |
Total Pages | : 44 |
Release | : 2013 |
Genre | : |
ISBN | : |
Author | : Robert Lensink |
Publisher | : |
Total Pages | : 36 |
Release | : 2008 |
Genre | : |
ISBN | : |
This paper analyzes the choice of signaling mechanisms by firms in a loan arrangement with banks. In a world of asymmetric information, firms have several debt instruments and hence can use them simultaneously to self-select. It is shown that different separating equilibria may result for self-selection. If separation occurs, low-quality firms will always borrow long-term debt without collateral, while high-quality firms will borrow long-term debt with collateral or borrow short-term debt with or without collateral. The optimal loan policy depends on the relative signaling costs of the different signaling mechanisms. Separation will be more likely if the proportion of low-quality firms in the market is higher.
Author | : Fabio Schiantarelli |
Publisher | : World Bank Publications |
Total Pages | : 44 |
Release | : 1997 |
Genre | : Corporate debt |
ISBN | : |
Author | : Petra Danisevska |
Publisher | : |
Total Pages | : 30 |
Release | : 2002 |
Genre | : |
ISBN | : |
This paper empirically examines the effect of asymmetric information between managers and lenders on debt maturity structure of firms. The measures of short and long-term asymmetric information are derived from the dispersion of analysts' earnings forecasts. Short-term information asymmetry positively affects debt maturity. We find no relation between long-term asymmetric information and debt maturity. Goswami, Noe and Rebello (1995) suggest that optimal debt maturity structure depends on the term structure of asymmetric information. Our results provide no support for this model. Next, we focus on short-term asymmetric information. The findings imply that firms with both good news and high short-term asymmetric information rely significantly more on short-term debt. Further, a higher proportion of collateral in informational problematic firms leads to higher debt maturity. The maturity matching is strongly supported.
Author | : S. Abraham Ravid |
Publisher | : |
Total Pages | : 78 |
Release | : 1996 |
Genre | : Corporate debt |
ISBN | : |
Author | : Gautam Goswami |
Publisher | : |
Total Pages | : |
Release | : 2010 |
Genre | : |
ISBN | : |
The existing research on debt-maturity under asymmetric information has focused on the impact of differential information regarding asset quality on the debt maturity decision. This research has generally indicated the optimality of short-term debt financing as a vehicle of mitigating the adverse selection problem. In this paper, we consider the impact of information asymmetry regarding the maturity structure of cash flows on the debt maturity decision. We demonstrate that, in this context, long-term debt is generally the form of debt financing most effective in alleviating the adverse selection problem. We also show that costs of adverse selection may induce some mismatching of debt maturity and asset maturity in the presence of significant transaction costs.