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Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes

Published online by Cambridge University Press:  24 May 2013

Vidhan K. Goyal  and
Wei Wang
Vidhan K. Goyal
Affiliation:
goyal@ust.hk, Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Wei Wang
Affiliation:
wwang@business.queensu.ca, School of Business, Queen’s University, 401 Goodes Hall, Kingston, Ontario K7L 3N6, Canada
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 789 - 817
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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