Debt Maturity, Credit Risk and Information Asymmetry: The Case of Municipal Bonds

The Financial Review, Forthcoming

28 Pages Posted: 10 Oct 2009

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Demissew Diro Ejara

University of New Haven

Jayaraman Vijayakumar

Virginia Commonwealth University (VCU) - Department of Accounting

Date Written: October 9, 2009

Abstract

Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. We find that under conditions of lower information asymmetry that prevails in the municipal sector, higher-rated bonds have longer maturities than low-rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addittion, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.

Keywords: municipal bonds, debt maturity, risk, credit quality, information asymmetry

JEL Classification: G110, G120, G140

Suggested Citation

Daniels, Kenneth N. and Ejara, Demissew Diro and Vijayakumar, Jayaraman, Debt Maturity, Credit Risk and Information Asymmetry: The Case of Municipal Bonds (October 9, 2009). The Financial Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1486276

Kenneth N. Daniels (Contact Author)

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Demissew Diro Ejara

University of New Haven ( email )

300 Boston Post Road
Pompea College of Business
West Haven, CT 06516
United States
(203) 932-7150 (Phone)

Jayaraman Vijayakumar

Virginia Commonwealth University (VCU) - Department of Accounting ( email )

Richmond, VA 23284
United States

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