On the signalling property of debt maturity: empirical evidence from a private bank in Vietnam

Abstract

This article provides new empirical evidence for the relevance of the signalling view on debt maturity, using data from a private bank in Vietnam. More specifically, we test the empirical predictions of the two main signalling models on debt maturity, that is, the models by Flannery (1986) and Diamond (1991), and compare this with the debt covenant view. The results of our regressions provide strong evidence for a downward-sloping effect of firm quality on maturity, which is in line with the signalling model of Flannery (1986), and contradict the debt covenant view. Our empirical analysis does not support the model by Diamond (1991).

Notes

Lensink is also external credit fellow, University of Nottingham, UK.

¹For other empirical papers testing the choice of debt maturity as a signalling tool, see, e.g. Guedes and Opler (1996) and Mitchell (1993).