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Debt Maturity, Credit Risk, and Information Asymmetry: The Case of Municipal Bonds

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  • Kenneth Daniels
  • Demissew Diro Ejara
  • Jayaraman Vijayakumar

Abstract

Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. We find that under conditions of lower information asymmetry that prevails in the municipal sector, higher‐rated bonds have longer maturities than low‐rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addition, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.

Suggested Citation

  • Kenneth Daniels & Demissew Diro Ejara & Jayaraman Vijayakumar, 2010. "Debt Maturity, Credit Risk, and Information Asymmetry: The Case of Municipal Bonds," The Financial Review, Eastern Finance Association, vol. 45(3), pages 603-626, August.
  • Handle: RePEc:bla:finrev:v:45:y:2010:i:3:p:603-626
    DOI: 10.1111/j.1540-6288.2010.00263.x
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    File URL: https://doi.org/10.1111/j.1540-6288.2010.00263.x
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    Cited by:

    1. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(2), pages 1-16, May.
    2. Kubick, Thomas R. & Lockhart, G. Brandon, 2017. "Corporate tax aggressiveness and the maturity structure of debt," Advances in accounting, Elsevier, vol. 36(C), pages 50-57.

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