Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes
66 Pages Posted: 19 Mar 2009 Last revised: 24 Jul 2014
Date Written: August 8, 2011
Asymmetric information models suggest that a borrower's choice of debt maturity depends on its private information about its default probabilities, i.e., 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 in borrowers' 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.
Keywords: Debt Maturity, Debt Issuance, Default Risk, Signaling, Timing, Distance-to-Default, Asset Volatility
JEL Classification: G30, G32
Suggested Citation: Suggested Citation