Information Asymmetry and the Sinking Fund Provision

Chunchi Wu

Journal of Financial and Quantitative Analysis, 1993, vol. 28, issue 3, 399-416

Abstract: This paper examines the signalling implications of sinking funds and shows that under information asymmetry the sinking fund amortization rate provides a credible signal for the quality of the firm. In a separating equilibrium, better quality firms choose higher sinking fund amortization rates in their bond issues. A latent index model is proposed for testing the hypothesis of sinking fund signalling. Empirical evidence indicates that the sinking fund amortization rate signals the credit quality of the firm.

Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:28:y:1993:i:03:p:399-416_00

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