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On signalling and debt maturity choice

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  • Robert Lensink
  • Pham Thi Thu Tra

Abstract

The theoretical literature on a firm's choice of debt maturity argues that a borrowing firm can signal its value in an asymmetric information setting by borrowing short. This well-known fact is based on Flannery (1986). This note questions the use of debt maturity as a signalling device. It argues that the signalling model by Flannery incorrectly ignores incentive compatibility constraints. If incentive compatibility constraints are added, the parameter space for a separating equilibrium shrinks.

Suggested Citation

  • Robert Lensink & Pham Thi Thu Tra, 2006. "On signalling and debt maturity choice," Applied Financial Economics Letters, Taylor & Francis Journals, vol. 2(4), pages 239-241.
    • Handle: RePEc:taf:raflxx:v:2:y:2006:i:4:p:239-241
    DOI: 10.1080/17446540500461737
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