On signalling and debt maturity choice
AbstractThe 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.
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Bibliographic InfoPaper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 06E03.
Date of creation: 2006
Date of revision:
Other versions of this item:
- NEP-ACC-2006-05-06 (Accounting & Auditing)
- NEP-ALL-2006-05-06 (All new papers)
- NEP-CFN-2006-05-06 (Corporate Finance)
- NEP-MIC-2006-05-06 (Microeconomics)
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- Allen N. Berger & Marco A. Espinosa-Vega & W. Scott Frame & Nathan H. Miller, 2005.
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- Allen N. Berger & Marco A. Espinosa-Vega & W. Scott Frame & Nathan H. Miller, 2004. "Debt maturity, risk, and asymmetric information," Finance and Economics Discussion Series 2004-60, Board of Governors of the Federal Reserve System (U.S.).
- Allen N. Berger & Marco A. Espinosa-Vega & W. Scott Frame & Nathan H. Miller, 2004. "Debt maturity, risk, and asymmetric information," Working Paper 2004-32, Federal Reserve Bank of Atlanta.
- Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
- Patrick Bolton & Mathias Dewatripont, 2005.
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262025760, January.
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