Debt Maturity, Credit Risk and Information Asymmetry: The Case of Municipal Bonds
The Financial Review, Forthcoming
28 Pages Posted: 10 Oct 2009
Date Written: October 9, 2009
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: Suggested Citation