On signalling and debt maturity choice

Robert Lensink () and Tra Thi Thu Pham ()

Applied Financial Economics Letters, 2006, vol. 2, issue 4, pages 239-241

Abstract: The theoretical literature on a firm's choice of debt maturity argues that a borrowing firm can signal its value in an asymmetric information setting by borrowing short. This well-known fact is based on Flannery (1986). This note questions the use of debt maturity as a signalling device. It argues that the signalling model by Flannery incorrectly ignores incentive compatibility constraints. If incentive compatibility constraints are added, the parameter space for a separating equilibrium shrinks.

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