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Debt maturity, credit risk, and information asymmetry: the case of municipal bonds
Kenneth N Daniels, Virginia Commonwealth University
Demissew Diro Ejara, University of New Haven
Jayaraman Vijayakumar, Virginia Commonwealth University
ABSTRACT: This paper empirically tests the determinants of municipal bond maturity. In this study, we argue that information asymmetry, agency problems and tax issues do not apply in the case of municipal bonds as they apply to corporate bonds. We test the impact of credit quality, asset maturity and other issuer and issue characteristics on the maturity of municipal bonds. We find that higher rated bonds have longer maturities than low rated bonds and that bond maturity increases when transaction costs are high. We also show that revenue bonds have longer maturities than general obligation bonds supporting the asset maturity hypothesis. In addition, our analysis finds that fundamentals matter. If an entity’s tax burden is high, its ability to issue long-term debt is curtailed and the ability to finance with more taxes is limited. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.
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