Tests of a Signalling Hypothesis: The Choice between Fixed and Adjustable Rate Debt

REVIEW OF FINANCIAL STUDIES, Vol 8 No 3

Posted: 25 Aug 1998

See all articles by José Correia Guedes

José Correia Guedes

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies

Rex Thompson

affiliation not provided to SSRN

Abstract

We develop a model wherein the choice between adjustable and fixed rate debt can serve as a signal of firm quality. The nature of the signal depends on expected inflation volatility relative to other risk parameters. Evidence from a matched sample of debt announcements over the period 1978-1986 shows a difference of -2.05% between stock price reactions to adjustable rate and fixed rate announcements when expected inflation volatility is above an estimated threshold. Below this threshold, the difference is a positive 0.98%. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.

JEL Classification: G30

Suggested Citation

Correia Guedes, José Filipe and Thompson, Rex W., Tests of a Signalling Hypothesis: The Choice between Fixed and Adjustable Rate Debt. REVIEW OF FINANCIAL STUDIES, Vol 8 No 3, Available at SSRN: https://ssrn.com/abstract=6551

José Filipe Correia Guedes

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies ( email )

Lisboa, 1600
Portugal

Rex W. Thompson (Contact Author)

affiliation not provided to SSRN

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