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The Impact of Information Asymmetry on Debt Pricing and Maturity
Regina Wittenberg - Moerman,
University of Pennsylvania
ABSTRACT. In this paper, I exploit the syndicated loan market to explore the impact of information asymmetry on debt pricing and maturity. As a measure of information asymmetry associated with a borrowing firm, I use the bid-ask spread on the firm’s loans traded on the secondary loan market. I find that a higher bid-ask spread on a borrower’s traded loans leads to a higher interest rate on the borrower’s subsequently issued loans. I show that both information asymmetry between syndicate lenders and a borrowing firm and information asymmetry between secondary loan market participants are priced in the loan interest rate. I also find that a higher bid-ask spread on the borrower’s traded loans is translated into shorter maturity of the borrower’s subsequently issued loans. This empirical evidence demonstrates that information asymmetry increases the cost of debt capital and decreases debt maturity.
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