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References (3)
-
J. Banks, J. Sobel (1987)
Equilibrium Selection in Signaling GamesEconometrica, 55
-
M. Flannery (1986)
Asymmetric Information and Risky Debt Maturity ChoiceJournal of Finance, 41
-
In-Koo Cho, David Kreps (1987)
Signaling Games and Stable EquilibriaQuarterly Journal of Economics, 102
- Publisher
- Wiley
- Copyright
- © The Southern Finance Association and the Southwestern Finance Association
- ISSN
- 0270-2592
- eISSN
- 1475-6803
- DOI
- 10.1111/j.1475-6803.1990.tb00545.x
- Publisher site
- See Article on Publisher Site
Abstract
In this paper the choice of risky debt maturity structure is analyzed in a sequential game framework. The focus is on the set of viable equilibria when there are no transaction costs associated with the choice of debt maturity structure. It is shown that when changes in firm value are independent over time, both short‐ and long‐term debt pooling are Nash sequential equilibrium outcomes. However, only the short‐term debt pooling outcome satisfies the universal divinity refinement. Relaxing the assumption of independent changes in firm value, it is demonstrated that a separating equilibrium in which higher‐quality firms issue short‐term debt and low‐quality firms issue long‐term debt may exist. Furthermore, conditions exist under which long‐term debt pooling is the universally divine outcome.
Journal
The Journal of Financial Research – Wiley
Published: Jun 1, 1990