Risky debt maturity choice in a sequential game equilibrium

Noe, Thomas and Kale, Jayant R (1990) Risky debt maturity choice in a sequential game equilibrium. The Journal of Financial Research, 13 (2). pp. 155-165.

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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 not 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 refinements. 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.

Item Type: Article
Keywords: Corporate debt; Debt; Equilibrium; Maturity; Transaction costs
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 19 Feb 2012 12:22
Last Modified: 23 Oct 2015 14:06
URI: http://eureka.sbs.ox.ac.uk/id/eprint/1160

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