Information Dynamics and Debt Maturity

51 Pages Posted: 5 Jan 2017 Last revised: 29 Apr 2019

See all articles by Thomas Geelen

Thomas Geelen

Copenhagen Business School - Department of Finance; Danish Finance Institute

Date Written: April 28, 2019

Abstract

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

Geelen, Thomas, Information Dynamics and Debt Maturity (April 28, 2019). Swiss Finance Institute Research Paper No. 16-78, Available at SSRN: https://ssrn.com/abstract=2894425 or http://dx.doi.org/10.2139/ssrn.2894425

Thomas Geelen (Contact Author)

Copenhagen Business School - Department of Finance

Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Danish Finance Institute ( email )

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