Debt Maturity, Credit Risk, and Information Asymmetry: The Case of Municipal Bonds

Daniels, Kenneth N.; Ejara, Demissew Diro; Vijayakumar, Jayaraman

doi:10.1111/j.1540-6288.2010.00263.x

Cited by 24 publications

(18 citation statements)

References 29 publications

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“…The findings of the study have answered the main research question and proved the hypothesis that there is a non-monotonic relationship between the credit-rating scales and debt maturity choices of Asian firms. The evidence is also supported by Diamond's (1991) theoretical framework and is consistent with U.S.-based studies (Barclay and Smith 1995;Mark Hoven Stohs 2002) and U.K. based studies (Naeem 2012), Moreover, the importance of credit ratings in the financial structure is also supported by previous studies (Bedendo and Siming 2016;Daniels et al 2010;Gul and Goodwin 2010;Lütkebohmert et al 2017;Naeem 2012). The study also reveals that credit rating has a substantial effect on the optimization of debt maturity structure of Asian companies.…”

Section: Discussionsupporting

confidence: 86%

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

Sajjad

Zakaria

2018

JRFM

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The purpose of this study is to examine the relationship between credit rating scales and debt maturity choices. A liquidity hypothesis is used to formulate the testable proposition and conceptual framework. Generalized linear model (GLM) and pooled ordinary least square (OLS) are utilized by SAS programming to test the proposed hypothesis. Other different estimation techniques are also used for robust evidence. Results suggest that companies with high and low ratings have a shorter debt maturity. Companies with medium ratings have longer debt maturity structure. Liquidity shows a negative association with longer debt maturity structure. It is evident that at high rating scale with high liquidity, and at lower rating scales with lower liquidity firms have a shorter debt maturity. Mid rated firms with a low probability of refinancing risk show longer debt maturity structure. Considering refinancing risk by Asian companies make the nonlinear relationship between credit ratings and debt maturity choices. Results suggest the importance of credit ratings for the optimization of debt maturity structure of Asian firms, which was totally overlooked by the past studies. The findings of this study are consistent with the liquidity hypothesis. The findings also motivating financial managers and investors to consider credit ratings as a measure of financial constraints.

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Section: Discussionsupporting

confidence: 86%

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

Sajjad

Zakaria

2018

JRFM

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“…These results are consistent with previous studies of municipal bond maturities [4] . There is significant direct relation between maturity and credit score.…”

Section: And 3 Respectively Dependent Variables ---------------------supporting

confidence: 83%

Impact of Information Asymmetry on Municipal Bond Yields: An Empirical Analysis

Daniels

Ejara²

2009

American Journal of Economics and Business Administration

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Problem statement:There is a significant difference between the interest rates on the GO and the RV municipal bonds. We sought explanation for this difference in differences in information asymmetry between the two types of municipal bonds. GO bonds finance general municipality expenditures and repayment is from general tax revenues. RV bonds finance special projects and repayment is from cash flows of the special projects. These projects are assumed to be more asymmetric than the general municipality tax revenues. Previous studies examined this issue but did not explicitly consider the information asymmetry differences. Approach: We used issue transaction spread as a proxy for information asymmetry. Average spread for RV bonds is 1.172% while that for GO bonds is 0.892%. We controlled for external economic factors, issue and issuer features and contractual terms that might affect yield on debt. We used two-step regression analyses to explain yields on the two types of municipal bonds. Results: RV bonds cost 74 basis points more on the average than GO bonds. After controlling for external economic factors, issue and issuer features and contract terms, the difference shrank to an average of 44 basis points. Issue transaction spread, our proxy for information asymmetry and credit rating were important determinants of bond yields. Conclusion/Recommendations: Issue transaction spread, as a proxy for information asymmetry, explained differences in bond yields. Other variables that affect yield differences were credit rating, maturity, economic activities, contract terms and other issue and issuer features. Still, there remained an unexplained difference in the yields between RV and GO bonds of 44 basis points that we left for further research. This difference was inversely related to the credit rating of the bond.

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“…We use variable

M a t Y e a r s

, final maturity in years, to test that association in the municipal bond market. We expect

T I C

to increase with maturity (Daniels, Ejara, and Vijayakumar ).…”

Section: Data and Variablesmentioning

confidence: 99%

Which Bonds Are More Expensive? The Cost Differentials by Debt Issue Purpose and the Method of Sale: An Empirical Analysis

Guzman

Moldogaziev²

2012

Public Budgeting & Finance

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In this paper, we survey the cost differentials by debt issue purpose and the method of underwriting. We find that cost differentials are a function of the purpose for which the debt was issued, with bond purposes traditionally considered riskier facing higher borrowing costs. However, this effect is not uniform and varies by credit quality portfolios. Moreover, the method of bond sale is an important factor for true interest costs. Overall, the competitive method of sale consistently performs better than the negotiated method of sale in all regression models, even after correcting for self-selection. Guzman and Moldogaziev/Cost Differentials by Debt Issue Purpose and Method of Sale 79sale method matter? Other debt issuance decisions may also be of high importance-debt instrument structure choices, special options, credit enhancements, and payment structures and sources-all will have direct implications for municipal borrowing costs. Previous empirical studies suggest that credit ratings (both enhanced and underlying), call and put provisions, underwriter's method of sale, and a maturity structure of bond series are significant factors in a broad array of determinants that have been found to have a significant effect on municipal borrowing costs (Denison, Yan, and Robbins and Simonsen 2007). Researchers have also found that revenue bond issuers, compared to general obligation (GO) bonds, pay higher interest on their debt (Hopwell and Kaufman 1977;Peng and Brucato 2004;Yusuf and Liu 2008). However, with a few exceptions, these studies tend to focus on a single industry or aggregate the issue purpose types to low-risk and high-risk categories (Peng and Brucato 2004). Consequently, studies that address diverse industries and cost differentials associated with such diversity are rare. We attempt to fill this gap by presenting empirical evidence on cost differentials by debt issue industry in California and by discussing management decision choices on how to keep municipal debt issue costs as low as possible. We distinguish between debt industries issued for the purposes of higher and secondary education, development, public facilities, housing, utilities, environmental facilities, health care, transportation, and other miscellaneous purposes. In addition to issue purpose, we pay attention to the sources of debt repayment to account for the differences in interest costs based on perceived default probabilities by market participants. We use controls for market-related and issue/issuer specific characteristics. 1 We begin our paper by discussing the background rationale and the relevant literature from the field of state and local government debt finance. We then describe characteristics of the data that we use in this empirical research and carefully examine outcome and explanatory variables. In the discussion of variables, embedded are the findings from current municipal finance literature that provide theoretical and empirical justifications for the variables in the regression models. After the discussion of vari...

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Debt Maturity, Credit Risk, and Information Asymmetry: The Case of Municipal Bonds

Cited by 24 publications

References 29 publications

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

Impact of Information Asymmetry on Municipal Bond Yields: An Empirical Analysis

Which Bonds Are More Expensive? The Cost Differentials by Debt Issue Purpose and the Method of Sale: An Empirical Analysis

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