Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes

66 Pages Posted: 19 Mar 2009 Last revised: 24 Jul 2014

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Wei Wang

Queen's School of Business; University of Pennsylvania - The Wharton School

Date Written: August 8, 2011

Abstract

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

Goyal, Vidhan K. and Wang, Wei, Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes (August 8, 2011). Journal of Financial and Quantitative Analysis (JFQA), Vol. 48, Issue 3, pp 789-817, 2013. Available at SSRN: https://ssrn.com/abstract=1364985

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Wei Wang

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Queen's School of Business ( email )

143 Union Street
Kingston, Ontario K7L 3N6
Canada

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