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Asymmetric Information and Roll-over Risk

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  • Philipp König
  • David Pothier

Abstract

How do banks choose their debt maturity structure when credit markets are subject to information frictions? This paper proposes a model of equilibrium maturity choice with asymmetric information and endogenous roll-over risk. We show that in the presence of public signals about firms' creditworthiness (credit ratings), firms choose to expose themselves to positive roll-over risk in order to minimize price distortions. Short-term financing is socially desirable when banks' capacity to repay short-term creditors depends on their credit rating, as it helps mitigate the underlying adverse selection problem. Notwithstanding these social benefits, the equilibrium maturity structure always exhibits inefficient short-termism. If banks receiving a credit downgrade face sufficiently high roll-over risk, the equilibrium maturity structure approaches the constrained efficient allocation.

Suggested Citation

  • Philipp König & David Pothier, 2014. "Asymmetric Information and Roll-over Risk," Discussion Papers of DIW Berlin 1364, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1364
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    More about this item

    Keywords

    Debt maturity; rollover risk; asymmetric information; global games;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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