Ambiguous Credit Information Quality and Debt Maturity Structure

Information about credit quality is uncertain and varies across debt maturity. We show that an ambiguity-averse firm manager will avoid maturities with ambiguous credit information. We thus hypothesize that firms choose maturity structures where perceived credit quality uncertainty is lower. Empirical results strongly support the hypothesis using ambiguity measures based on dispersions in firm survival probabilities predicted by credit rating agencies. Even when short-term debt is cheaper, firms are likely to increase long-term borrowing if its credit-quality ambiguity is lower (and vice versa). Higher credit-quality ambiguity in short-term (long-term) bonds significantly predicts decreases (increases) in the use of short-term debt