On signalling and debt maturity choice
The theoretical literature on a firm's choice of debt maturity argues that a borrowing firm can signal its value in an asymmetric information setting by borrowing short. This well-known fact is based on Flannery (1986). This note questions the use of debt maturity as a signalling device. It argues that the signalling model by Flannery incorrectly ignores incentive compatibility constraints. If incentive compatibility constraints are added, the parameter space for a separating equilibrium shrinks.
Year of publication: |
2006
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Authors: | Lensink, Robert ; Tra, Pham Thi Thu |
Published in: |
Applied Financial Economics Letters. - Taylor and Francis Journals, ISSN 1744-6546. - Vol. 2.2006, 4, p. 239-241
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Publisher: |
Taylor and Francis Journals |
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