Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes

Vidhan Goyal and Wei Wang

Journal of Financial and Quantitative Analysis, 2013, vol. 48, issue 3, 789-817

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.

Date: 2013
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