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Temporal Resolution of Uncertainty and Corporate Debt Yields: an Empirical Investigation

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Author Info
Alexander Reisz
Abstract

This paper is intended to measure Reisz's (1999) empirical implication about bond yields against data: yields demanded on corporate debt should be higher the later the uncertainty facing the firm is resolved. We conduct our study looking at new bond issues made by industrial corporations between 1987 and 1996. Based on this sample, we find strong evidence that firms with more delayed resolution of uncertainty offer higher yields once default and overall risks have been controlled for. We also find that the maturity premium on corporate bonds is monotonic in the pattern of Temporal Resolution of Uncertainty (TRU) facing the firm. Both results are mitigated for firms whose managers enjoy fewer information asymmetries. We also find that firms with more delayed TRU rely less heavily on debt and tend to issue shorter-term bonds.

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Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-043.

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Date of creation: Nov 1999
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Handle: RePEc:fth:nystfi:99-043

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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Web page: http://w4.stern.nyu.edu/finance/
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Goswami, Gautam & Noe, Thomas H & Rebello, Michael J, 1995. " Debt Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 50(2), pages 633-59, June. [Downloadable!] (restricted)
  2. Stohs, Mark Hoven & Mauer, David C, 1996. "The Determinants of Corporate Debt Maturity Structure," Journal of Business, University of Chicago Press, vol. 69(3), pages 279-312, July. [Downloadable!] (restricted)
  3. Guedes, Jose & Opler, Tim, 1996. " The Determinants of the Maturity of Corporate Debt Issues," Journal of Finance, American Finance Association, vol. 51(5), pages 1809-33, December. [Downloadable!] (restricted)
  4. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 709-37, August. [Downloadable!] (restricted)
  5. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January. [Downloadable!] (restricted)
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  6. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March. [Downloadable!] (restricted)
  7. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December. [Downloadable!] (restricted)
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  8. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
  9. Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March. [Downloadable!] (restricted)
  10. John C. Easterwood & Stacey R. Nutt, 1999. "Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?," Journal of Finance, American Finance Association, vol. 54(5), pages 1777-1797, October. [Downloadable!] (restricted)
  11. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March. [Downloadable!] (restricted)
  12. Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 50(2), pages 609-31, June. [Downloadable!] (restricted)
  13. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  14. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October. [Downloadable!] (restricted)
  15. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(2), pages 227-54. [Downloadable!] (restricted)
  16. Epstein, Larry G & Turnbull, Stuart M, 1980. " Capital Asset Prices and the Temporal Resolution of Uncertainty," Journal of Finance, American Finance Association, vol. 35(3), pages 627-43, June. [Downloadable!] (restricted)
  17. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexander Reisz, 1999. "Temporal Resolution of Uncertainty, the Investment Policy of Levered Firms and Corporate Debt Yields," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-044, New York University, Leonard N. Stern School of Business-. [Downloadable!]
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