Asset Maturity Debt Covenants And Debt Maturity Choice
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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.
Author | : Fabio Schiantarelli |
Publisher | : World Bank Publications |
Total Pages | : 44 |
Release | : 1997 |
Genre | : Corporate debt |
ISBN | : |
Author | : Yongjin Kim |
Publisher | : |
Total Pages | : 66 |
Release | : 2017 |
Genre | : |
ISBN | : |
This study revisits the relation between firms' choices of debt maturity and their investment in a dynamic world. Prior research, including Myers (1977), suggests that financing with short-term debt resolves the underinvestment problem caused by debt financing. In contrast, I establish that short-term debt can reduce the incentive to invest due to larger exposure to default risk from more frequent debt rollovers. Long-term debt, however, is more subject to illiquidity costs, so firms find optimal maturity by balancing these opposing forces. For the firm with average investment and financing, the agency cost arising from the underinvestment is 0.77% of firm value. This suggests that previous studies overestimate the cost by ignoring firms' flexibility in choosing maturity. I also measure firm-specific agency costs using likelihood-based structural estimation. The measured agency costs show significant cross-sectional variation due to heterogeneity in firm characteristics and convexity of the agency costs. The economy-wide average of the costs is 7.28%, which is considerably higher than the cost for the average firm.
Author | : Calvin D. Schnure |
Publisher | : |
Total Pages | : 31 |
Release | : 1994 |
Genre | : |
ISBN | : |
Author | : Lina I. Sharara-Taher |
Publisher | : |
Total Pages | : |
Release | : 1994 |
Genre | : |
ISBN | : |
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 | : Calvin D. Schnure (Wirtschaftswissenschaftler.) |
Publisher | : |
Total Pages | : 31 |
Release | : 1994 |
Genre | : |
ISBN | : |
Author | : Philip R. Wood |
Publisher | : Sweet & Maxwell |
Total Pages | : 493 |
Release | : 2007 |
Genre | : Bail |
ISBN | : 1847032087 |
This volume provides coverage of syndicated bank credit agreements and loan transfers, international bond issues including equity-linked bonds, note programs and high yield notes, bondholder trustees and collective action clauses and more.
Author | : Pyung-Kee Kim |
Publisher | : |
Total Pages | : 320 |
Release | : 1992 |
Genre | : Corporate debt |
ISBN | : |
Author | : Mr.Amadou N. R. Sy |
Publisher | : International Monetary Fund |
Total Pages | : 30 |
Release | : 1999-07-01 |
Genre | : Business & Economics |
ISBN | : 1451851707 |
The paper analyzes the choice between public and private debt by an entrenched manager. The model shows that when the firm’s credit risk is low, management issues public bonds because of the value gains from increased flexibility rather than reduced restrictions and monitoring. In fact, management’s expected private gains decrease as initial private debt restrictions are selectively relaxed. In contrast, when credit risk is high, management issues private debt because of the value gains and private benefits from renegotiating more stringent restrictions. When the maturity of private debt is shortened, however, privately and publicly placed bonds can be preferred to bank debt.