Information Asymmetry and the Bond Coupon Choice

Posted: 22 Dec 2015 Last revised: 9 Jun 2017

Dan Amiram

Columbia Business School - Accounting, Business Law & Taxation

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

N. Bugra Ozel

Date Written: June 8, 2017

Abstract

We examine the role of the coupon choice in bond contracts as a signaling mechanism in the presence of information asymmetry between borrowers and lenders about the credit quality of the borrower. Prior literature focuses on the use of maturity as a signaling mechanism. We conjecture that the coupon is a more effective signaling mechanism. We exploit the enactment of Regulation Fair Disclosure (RegFD) as an exogenous shock to the level of information asymmetry, and employ both bond and equity market based variables of information asymmetry to test our conjecture. We find that following the enactment of RegFD, the coupon rates of bonds issued by unrated firms increase relatively more than those of rated firms, consistent with the coupon choice addressing information asymmetry. We fail to find similar increases in maturity. Our inferences remain the same when using the probability of informed trade to measure relative changes in information asymmetry around the enactment of RegFD. We also draw similar conclusions utilizing exogenous drops in analyst coverage that result from brokerage house closures as an alternative quasi-natural experiment. Finally, we provide evidence that the coupon is used more extensively when issuance costs are higher, precisely when maturity is predicted to be a less efficient contract term with which to address information asymmetry.

Keywords: Bond contracting; Coupon rate; Information asymmetry; Maturity; Capital market frictions

JEL Classification: G10; G23; M21; M41

Suggested Citation

Amiram, Dan and Kalay, Alon and Kalay, Avner and Ozel, N. Bugra, Information Asymmetry and the Bond Coupon Choice (June 8, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2707282 or http://dx.doi.org/10.2139/ssrn.2707282

Dan Amiram

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Avner Kalay

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

No contact information is available for N. Bugra Ozel

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