Collateral and the Debt Maturity Choice Under Asymmetric Information: A Signaling Model

36 Pages Posted: 8 Feb 2005

See all articles by Robert Lensink

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance; Wageningen UR - Development Economics Group

Tra Pham

affiliation not provided to SSRN

Abstract

This paper analyzes the choice of signaling mechanisms by firms in a loan arrangement with banks. In a world of asymmetric information, firms have several debt instruments and hence can use them simultaneously to self-select. It is shown that different separating equilibria may result for self-selection. If separation occurs, low-quality firms will always borrow long-term debt without collateral, while high-quality firms will borrow long-term debt with collateral or borrow short-term debt with or without collateral. The optimal loan policy depends on the relative signaling costs of the different signaling mechanisms. Separation will be more likely if the proportion of low-quality firms in the market is higher.

Keywords: Debt maturity, asymmetric information, signaling, collateral

JEL Classification: D82, G21, G32

Suggested Citation

Lensink, Robert and Pham, Tra, Collateral and the Debt Maturity Choice Under Asymmetric Information: A Signaling Model. Available at SSRN: https://ssrn.com/abstract=663862 or http://dx.doi.org/10.2139/ssrn.663862

Robert Lensink (Contact Author)

University of Groningen - Department of Economics, Econometrics and Finance ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Wageningen UR - Development Economics Group ( email )

Hollandseweg 1
WAGENINGEN, 6706 KN
Netherlands

Tra Pham

affiliation not provided to SSRN

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