Risky Debt-Maturity Choice Under Information Asymmetry

Sheen Liu and Chunchi Wu
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Sheen Liu: Youngstown State University, USA
Chunchi Wu: Singapore Management University, Singapore and Syracuse University, USA

Chapter 4 in Advances in Quantitative Analysis of Finance and Accounting, 2006, pp 75-96 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe traditional equilibrium models of signaling with debt-maturity require transaction costs by firms when raising new capital. In this paper, we propose a new model that has no such requirement. We demonstrate that a separating equilibrium of debt-maturity choice exists under a much more general condition, once accounting for the interactions between borrowers and lenders. The model is able to explain the observed complex financial structure. It is found that callable debt functions much like short-term debt, and serial debt similar to long-term debt. In equilibrium, high-quality firms issue short-term debt, and low-quality firms issue long-term debt.

Keywords: Earnings Management; Management Compensation; Option Theory and Application; Debt Management and Interest Rate Theory; Portfolio Diversification; Earnings Surprise (search for similar items in EconPapers)
Date: 2006
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