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Federal Reserve Bank of Chicago
Working Paper Series
Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads
We propose a tractable model of a firm’s dynamic debt and equity issuance policies in the presence of asymmetric information. Because “investment-grade” firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the “asymmetric information channel” can generate jumps to default (from the creditors’ perspective) only for those "high-yield" firms that have exhausted their ability to borrow. Thus, our model deepens the “credit spread puzzle” for investment-grade firms.
Cite this item
Luca Benzoni & Lorenzo Garlappi & Robert S. Goldstein, Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads, Federal Reserve Bank of Chicago, Working Paper Series WP-2019-8, 02 Sep 2019.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
Keywords: Credit spreads; Capital structure; Corporate Default; Debt; Jumps to Default; Investments
This item with handle RePEc:fip:fedhwp:wp-2019-08
is also listed on EconPapers
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