Debt Maturity, Risk, and Asymmetric Information

Authors

  • ALLEN N. BERGER,

  • MARCO A. ESPINOSA-VEGA,

  • W. SCOTT FRAME,

  • NATHAN H. MILLER

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    • Berger is at the Board of Governors of the Federal Reserve System and Wharton Financial Institutions Center, Espinosa-Vega is at the International Monetary Fund, Frame is at the Federal Reserve Bank of Atlanta, and Miller is at the University of California at Berkeley. The views expressed do not necessarily reflect those of the Federal Reserve Board, Federal Reserve Bank of Atlanta, the International Monetary Fund, or their staffs. The authors thank Rick Green and the anonymous referee for very helpful suggestions that improved the paper. We also thank Mark Flannery and Doug Diamond for their encouragement and suggestions. We thank as well Bob Avery, Steve Dennis, Giovanni Dell'Ariccia, Jerry Dwyer, Diana Hancock, Alan Hess, Steve Smith, Phil Strahan, Greg Udell, and participants at the Financial Intermediation Research Society conference, the Allied Social Science Associations meetings, the Financial Management Association meetings, the All-Georgia Finance Conference, and the Credit Scoring and Credit Control meetings for helpful comments, and Phil Ostromogolsky and Laura Kawano for outstanding research assistance.

ABSTRACT

We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our 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. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.

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