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Credit information quality and corporate debt maturity: theory and evidence

Marco Sorge and Chendi Zhang

No 4239, Policy Research Working Paper Series from The World Bank

Abstract: This paper provides new theoretical and empirical evidence suggesting that the quality of credit information may be a key element in explaining the maturity structure of corporate debt around the world. In markets with poor credit information and hence a high degree of uncertainty about borrower quality, the authors find suboptimal equilibria in which short-term contracts are preferred either as a hedge against uncertainty to limit losses in bad states (in the symmetric information case) or as a screening device to learn about borrower credit quality in the course of a repeated lending relationship (in the asymmetric information case). The results of the model are supported by the econometric analysis of panel data from both industrial and developing economies. The authors find that countries with better quality of credit information (for example, as a result of improvements in credit reporting systems or accounting standards) are characterized by a higher share of long-term debt as a proportion of total corporate debt ceteris paribus. The findings suggest that promoting institutions and policies to improve the quality of credit information is an important prerequisite for increasing access of firms to long-term finance.

Keywords: Banks&Banking Reform; Financial Intermediation; Economic Theory&Research; Insurance&Risk Mitigation; Financial Crisis Management&Restructuring (search for similar items in EconPapers)
Date: 2007-06-01
New Economics Papers: this item is included in nep-ias
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