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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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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    2. Karlyn Mitchell, 1993. "The Debt Maturity Choice: An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 309-320, December.
    3. Flannery, Mark J, 1986. "Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
    4. Mitchell, Karlyn, 1993. "The Debt Maturity Choice: An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 309-320, Winter.
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