Debt Maturity, Risk, and Asymmetric Information

Allen N. Berger, Marco A. Espinosa-Vega, W. Scott Frame, and Nathan H. Miller
Working Paper 2004-32
December 2004

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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 from more than 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.

JEL classification: G32, G38, G21

Key words: debt maturity, risk, asymmetric information, banks, credit scoring

The authors thank the editor, 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 Del’Ariccia, Jerry Dwyer, Diana Hancock, Alan Hess, Steve Smith, Phil Strahan, Greg Udell, and participants at the Financial Intermediation Research Society conference, the ASSA meetings, the Financial Management Association meetings, the All-Georgia Finance Conference, and the Credit Scoring and Credit Control meetings for helpful comments. They also thank Phil Ostromogolsky for outstanding research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Allen N. Berger, Mail Stop 153, Federal Reserve Board, 20th and C Streets, N.W., Washington, D.C. 20551, 202-452-2903, 202-452-5295, 292-452-5295 (fax),