Debt Maturity, Credit Risk, and Information Asymmetry: The Case of Municipal Bonds

Kenneth Daniels, Demissew Diro Ejara and Jayaraman Vijayakumar

The Financial Review, 2010, vol. 45, issue 3, 603-626

Abstract: Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. We find that under conditions of lower information asymmetry that prevails in the municipal sector, higher‐rated bonds have longer maturities than low‐rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addition, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.

Date: 2010
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