Information Dynamics and Debt Maturity

47 Pages Posted: 5 Jan 2017 Last revised: 12 Nov 2017

Thomas Geelen

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: November 10, 2017

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 (November 10, 2017). 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)

Ecole Polytechnique Fédérale de Lausanne ( email )

Switzerland

HOME PAGE: http://www.thomasgeelen.com

Swiss Finance Institute

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

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