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Incomplete Information, Debt Issuance, and the Term Structure of Credit Spreads

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Listed:
  • Luca Benzoni

    (Federal Reserve Bank of Chicago, Chicago, Illinois 60604)

  • Lorenzo Garlappi

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Robert Goldstein

    (Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

We derive a firm’s debt issuance policy when managers have an informational advantage over creditors and face debt restructuring costs. In our model, regardless of how poor their private signal is, managers of firms that can access the credit market avoid default by issuing new debt to service existing debt. Therefore, only bonds of firms that have exhausted their ability to borrow are subject to jump-to-default risk because of incomplete information and, in turn, command a jump-to-default risk premium. We document that our model captures many salient features of the corporate bond market.

Suggested Citation

  • Luca Benzoni & Lorenzo Garlappi & Robert Goldstein, 2023. "Incomplete Information, Debt Issuance, and the Term Structure of Credit Spreads," Management Science, INFORMS, vol. 69(7), pages 4331-4352, July.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:7:p:4331-4352
    DOI: 10.1287/mnsc.2022.4529
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