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Asymmetric Information and Roll-over Risk

Philipp König () and David Pothier

No 1364, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: How do banks choose their debt maturity structure when credit markets are subject to information frictions? This paper proposes a model of equilibrium maturity choice with asymmetric information and endogenous roll-over risk. We show that in the presence of public signals about firms' creditworthiness (credit ratings), firms choose to expose themselves to positive roll-over risk in order to minimize price distortions. Short-term financing is socially desirable when banks' capacity to repay short-term creditors depends on their credit rating, as it helps mitigate the underlying adverse selection problem. Notwithstanding these social benefits, the equilibrium maturity structure always exhibits inefficient short-termism. If banks receiving a credit downgrade face sufficiently high roll-over risk, the equilibrium maturity structure approaches the constrained efficient allocation.

Keywords: Debt maturity; rollover risk; asymmetric information; global games (search for similar items in EconPapers)
JEL-codes: G10 G20 G30 G32 (search for similar items in EconPapers)
Pages: 34 p.
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-cta
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