Signalling with Debt Maturity Choice

Fabrice Rousseau

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: This paper, presents a game theoretic approach to the choice of the debt maturity by firms. The maturity of the debt can be viewed as a signal about the firm's quality sent to the financial sector. Two situations are investigated when the firm declares bankruptcy: the firm's assets may have zero or positive value. In the first scenario, it is shown that under positive reputational loss concerns from the part of the firms, we can achieve a separating equilibrium where the good quality firm issues short maturity for its debt whereas the bad quality firm issues long maturity. In the second scenario, again the same type of separating equilibria occur. However, some equilibria do not require a costly signal to get separation of the two types.

Keywords: Signalling; Debt Maturity Choice; Short Term Debt; Long Term Debt (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Pages: 26 pages
Date: 1999-11
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