Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads

82 Pages Posted: 25 Sep 2019

See all articles by Luca Benzoni

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2019

Abstract

We propose a tractable model of a firm's dynamic debt and equity issuance policies in the presence of asymmetric information. Because "investment-grade" firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the "asymmetric information channel" can generate jumps to default (from the creditors' perspective) only for those "high-yield" firms that have exhausted their ability to borrow. Thus, our model deepens the "credit spread puzzle" for investment-grade firms.

Keywords: Credit spreads, Capital structure, Corporate Default, Jumps to Default

JEL Classification: G12, G32, G33

Suggested Citation

Benzoni, Luca and Garlappi, Lorenzo and Goldstein, Robert S., Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads (August 13, 2019). Available at SSRN: https://ssrn.com/abstract=3454816 or http://dx.doi.org/10.2139/ssrn.3454816

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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