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Signalling with Debt Maturity Choice

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  • Fabrice Rousseau;

    (Economics, National University of Ireland, Maynooth)

Abstract

This 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.

Suggested Citation

  • Fabrice Rousseau;, 1999. "Signalling with Debt Maturity Choice," Economics Department Working Paper Series n971099.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n971099.pdf
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    References listed on IDEAS

    as
    1. Michel Poitevin, 1989. "Financial Signalling and the "Deep-Pocket" Argument," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 26-40, Spring.
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    6. Jayant R. Kale & Thomas H. Noe, 1990. "Risky Debt Maturity Choice In A Sequential Game Equilibrium," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 155-166, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Signalling; Debt Maturity Choice; Short Term Debt; Long Term Debt;
    All these keywords.

    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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