Signalling with Debt Maturity Choice
AbstractThis paper, presents a game theoretic approach to the choice of the debt maturity by firms. The maturity of the debt can be viewed as a signal about the firm's quality sent to the financial sector. Two situations are investigated when the firm declares bankruptcy: the firm's assets may have zero or positive value. In the first scenario, it is shown that under positive reputational loss concerns from the part of the firms, we can achieve a separating equilibrium where the good quality firm issues short maturity for its debt whereas the bad quality firm issues long maturity. In the second scenario, again the same type of separating equilibria occur. However, some equilibria do not require a costly signal to get separation of the two types.
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Bibliographic InfoPaper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n971099.
Length: 26 pages
Date of creation: Nov 1999
Date of revision:
Signalling; Debt Maturity Choice; Short Term Debt; Long Term Debt;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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