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On signalling and debt maturity choice

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  • Lensink, Robert
  • Pham Thi Thu, Tra

    (Groningen University)

Abstract

The theoretical literature on a firm?s choice of debt maturity argues that a borrowing firm can signal its value in asymmetric information setting by borrowing short. This well-known fact is based on Flannery (1986). This paper questions the use of debt maturity as a signalling device. We demonstrate that Flannery?s (1986) signalling outcome is vulnerable on two accounts. First, the separating equilibrium established by Flannery is not driven by the incentive compatibility. Second, derivations of the separating equilibrium appear to be vulnerable due to the lack of the refinements of pooling equilibria. If correct constraints are provided, the parameter space for the separating equilibrium shrinks, moderating the signalling role of debt maturity.

Suggested Citation

  • Lensink, Robert & Pham Thi Thu, Tra, 2006. "On signalling and debt maturity choice," Research Report 06E03, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    • Handle: RePEc:gro:rugsom:06e03
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    File URL: http://irs.ub.rug.nl/ppn/294685839
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    References listed on IDEAS

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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    2. Flannery, Mark J, 1986. "Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
    3. 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.
    4. 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.
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