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Debt Maturity, Credit Risk, and Information Asymmetry: The Case of Municipal Bonds
Author(s) -
Daniels Kenneth,
Diro Ejara Demissew,
Vijayakumar Jayaraman
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00263.x
Subject(s) - maturity (psychological) , issuer , bond , information asymmetry , asset (computer security) , debt , business , monetary economics , quality (philosophy) , credit rating , economics , financial economics , financial system , finance , psychology , developmental psychology , philosophy , computer security , epistemology , computer science
Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. We find that under conditions of lower information asymmetry that prevails in the municipal sector, higher‐rated bonds have longer maturities than low‐rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addition, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.