Debt Maturity, Risk, and Asymmetric Information

Topics:
Commercial Banking
Tags:
Debt Maturity,
Federal Reserve Board,
Financial Services
Source:
Federal Reserve Board

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Overview: The study tests the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and then examines the overall importance of informational asymmetries in debt maturity choices. The study employ data on over 6,000 commercial loans from 53 large U.S. banks. The results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms' conflict with the predictions of Diamond's model and with much of the empirical literature. The findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.

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Format: PDF | Size: 462KB | Date: Oct 2004 | Pages: 42

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