Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-13T11:23:00.941Z Has data issue: false hasContentIssue false
  • English
  • Français

Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes

Published online by Cambridge University Press:  24 May 2013

Vidhan K. Goyal  and
Wei Wang
Vidhan K. Goyal
Affiliation:
goyal@ust.hk, Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Wei Wang
Affiliation:
wwang@business.queensu.ca, School of Business, Queen’s University, 401 Goodes Hall, Kingston, Ontario K7L 3N6, Canada
Get access Rights & Permissions [Opens in a new window]

Abstract

Asymmetric information models suggest that a borrower’s choice of debt maturity depends on its private information about its default probabilities, that is, borrowers with favorable information prefer short-term debt while those with unfavorable information prefer long-term debt. We test this implication by tracing the evolution of debt issuers’ default risk following debt issuances. We find that short-term debt issuance leads to a decline inborrowers’ asset volatility and an increase in their distance to default. The opposite is true for long-term debt issues. The results suggest that borrowers’ private information about their default risk is an important determinant of their debt maturity choices.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 789 - 817
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acharya, V.; Bharath, S.; and Srinivasan, A.. “Does Industry-Wide Distress Affect Defaulted Firms? Evidence from Creditor Recoveries.” Journal of Financial Economics, 85 (2007), 368–419.CrossRefGoogle Scholar
Adam, T., and Goyal, V.. “The Investment Opportunity Set and Its Proxy Variables.” Journal of Financial Research, 31 (2008), 41–63.CrossRefGoogle Scholar
Altman, E. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.CrossRefGoogle Scholar
Altman, E., and Rijken, H.. “How Rating Agencies Achieve Rating Stability.” Journal of Banking and Finance, 28 (2004), 2679–2714.CrossRefGoogle Scholar
Baghai, R.; Servaes, H.; and Tamayo, A.. “Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing.” Working Paper, London Business School and London School of Economics (2011).CrossRefGoogle Scholar
Baker, M.; Greenwood, R.; and Wurgler, J.. “The Maturity of Debt Issues and Predictable Variation in Bond Returns.” Journal of Financial Economics, 70 (2002), 261–291.CrossRefGoogle Scholar
Barclay, M., and Smith, C.. “The Maturity Structure of Corporate Debt.” Journal of Finance, 50 (1995), 609–631.CrossRefGoogle Scholar
Berger, A.; Espinosa-Vega, M.; Frame, S.; and Miller, N.. “Debt Maturity, Risk, and Asymmetric Information.” Journal of Finance, 60 (2005), 2895–2923.CrossRefGoogle Scholar
Bharath, S., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–654.CrossRefGoogle Scholar
Blume, M.; Lim, F.; and MacKinlay, A.. “The Declining Credit Quality of Debt: Myth or Reality.” Journal of Finance, 53 (1998), 1389–1413.CrossRefGoogle Scholar
Cantor, R., and Mann, C.. “Are Corporate Bond Ratings Procyclical?” Special Comment, Moody’s Investors Service (2003).Google Scholar
Covitz, D., and Harrison, P.. “The Timing of Debt Issuance and Rating Migration: Theory and Evidence.” Working Paper, Federal Reserve Board (1999).CrossRefGoogle Scholar
Crosbie, P., and Bohn, J.. “Modeling Default Risk.” Technical Document, Moody’s KMV LLC (2003).Google Scholar
Diamond, D. “Debt Maturity Structure and Liquidity Risk.” Quarterly Journal of Economics, 106 (1991), 709–737.CrossRefGoogle Scholar
Duffie, D. Measuring Corporate Default Risk. Oxford: Oxford University Press (2011).CrossRefGoogle Scholar
Fama, E., and French, K.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Flannery, M. “Asymmetric Information and Risky Debt Maturity Choice.” Journal of Finance, 41 (1986), 19–37.CrossRefGoogle Scholar
Guedes, J., and Opler, T.. “The Determinants of the Maturity of Corporate Debt Issues.” Journal of Finance, 51 (1996), 1809–1833.CrossRefGoogle Scholar
Guner, B. “Loan Sales and the Cost of Corporate Borrowing.” Review of Financial Studies, 19 (2006), 687–716.CrossRefGoogle Scholar
Johnson, S. “Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage.” Review of Financial Studies, 16 (2003), 209–236.CrossRefGoogle Scholar
Kaplin, A., and Levy, A.. “Corporate Security Issues and Asset Returns.” Working Paper, University of California at Berkeley (2001).Google Scholar
King, T., and Mauer, D.. “Corporate Call Policy for Nonconvertible Bonds.” Journal of Business, 73 (2000), 403–444.CrossRefGoogle Scholar
Merton, R. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449–470.Google Scholar
Mitchell, K. “The Debt Maturity Choice: An Empirical Investigation.” Journal of Financial Research, 16 (1993), 309–320.CrossRefGoogle Scholar
Ohlson, J. “Financial Ratios and the Probabilistic Prediction of Bankruptcy.” Journal of Accounting Research, 18 (1980), 109–131.CrossRefGoogle Scholar
Ortiz-Molina, H., and Penas, M.. “The Role of Loan Maturity in Addressing Information Problems.” Small Business Economics, 30 (2008), 361–383.CrossRefGoogle Scholar
Robbins, E., and Schatzberg, J.. “Callable Bonds: A Risk-Reducing Signaling Mechanism.” Journal of Finance, 41 (1986), 935–949.Google Scholar
Scherr, F., and Hulbert, H.. “The Debt Maturity Structure of Small Firms.” Financial Management, 30 (2001), 85–111.CrossRefGoogle Scholar
Spiess, D., and Affleck-Graves, J.. “The Long-Run Performance of Stock Returns Following Debt Offerings.” Journal of Financial Economics, 1 (1999), 45–73.CrossRefGoogle Scholar
Stohs, M., and Mauer, D.. “The Determinants of Corporate Debt Maturity Structure.” Journal of Business, 69 (1996), 279–312.CrossRefGoogle Scholar
Sundaram, R., and Yermack, D.. “Pay Me Later: Inside Debt and Its Role in Managerial Compensation.” Journal of Finance, 62 (2007), 1551–1588.CrossRefGoogle Scholar
Vassalou, M., and Xing, Y.. “Default Risk in Equity Returns.” Journal of Finance, 59 (2004), 831–868.CrossRefGoogle Scholar