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The Impact of Information Asymmetry on Debt Pricing and Maturity

In this paper, I examine the impact of information asymmetry on debt pricing and maturity. The role of information asymmetry in debt contracting has long been of interest to researchers in accounting and finance. By investigating how information asymmetry influences debt contractual terms in the syndicated loan market, this paper demonstrates that information asymmetry increases the cost of debt capital and reduces the debt maturity.

The syndicated loan market is a promising setting to test the role of information asymmetry in debt contracting, because it includes both the primary loan market, where syndicated loans are originated and an active secondary market, where syndicated loans are traded after the close of primary syndication.

Loan trading data offers a methodological advantage in evaluating a borrower's information opacity: I utilize the bid-ask spread in the secondary loan trade as a measure of information asymmetry associated with a borrowing firm. Following Copeland and Galai (1983), Glosten and Milgrom (1985) and Kyle (1985), many papers rely on the bid-ask spread as the main measure of information asymmetry.

The empirical evidence presented in this paper demonstrates that the cost and maturity of a borrower's syndicated loan financing is determined to a large extent by information asymmetry, as measured by the bid-ask spreads on the borrower's loans traded on the secondary loan market. Specifically, I find that, ceteris paribus, the interest rate spread on a borrower's syndicated loan is positively related to the average bid-ask spread on its previous loans traded on the secondary loan market. I also show, ceteris paribus, a negative relation between the syndicated loan's maturity and the average bid-ask spreads on the borrower's traded loans.

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The Impact of Information Asymmetry on Debt Pricing and Maturity