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Signalling with Debt Maturity Choice

  • Fabrice Rousseau;

    ()

    (Economics, National University of Ireland, Maynooth)

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    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.

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    Paper 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.

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    Length: 26 pages
    Date of creation: Nov 1999
    Date of revision:
    Handle: RePEc:may:mayecw:n971099
    Contact details of provider: Postal: Maynooth, Co. Kildare
    Phone: 353-1-7083728
    Fax: 353-1-7083934
    Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting
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