Information Dynamics and Debt Maturity
47 Pages Posted: 5 Jan 2017 Last revised: 12 Nov 2017
Date Written: November 10, 2017
I develop a dynamic model of financing decisions and optimal debt maturity choice in which creditors face adverse selection and learn about the firm’s quality from news. In equilibrium, shareholders may choose to postpone debt issuance to reduce adverse selection and improve the pricing of newly issued debt. Over time, the benefits of learning decrease and zero-leverage firms eventually decide to issue debt. Because shorter maturity debt is less sensitive to information, younger firms issue shorter maturity debt to alleviate adverse selection while mature firms issue longer maturity debt, leading to a life-cycle theory of debt maturity.
Keywords: debt maturity; capital structure; adverse selection; zero leverage; debt issuance
JEL Classification: G32; D82; D83
Suggested Citation: Suggested Citation