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Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes

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  • Goyal, Vidhan K.
  • Wang, Wei

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.

Suggested Citation

  • Goyal, Vidhan K. & Wang, Wei, 2013. "Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(3), pages 789-817, June.
    • Handle: RePEc:cup:jfinqa:v:48:y:2013:i:03:p:789-817_00
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