Information Asymmetry, Risk Rating, and Debt Maturity: Evidence from Small Business Data

Abstract

This paper examines the interactive effects of risk ratings and banking

relationships on debt maturity choice. Previous studies posit that there

exist important interactions between risk ratings and proprietary

information generated from monitoring. I test their predictions by

introducing banking relationships as a proxy for proprietary information

about borrowers. I find that, in the absence of prior banking

relationships, both low-and high-risk firms borrow on shorter-term

bases than intermediate-risk firms. With long-lasting banking

relationships, however, the effects of risk ratings on maturity

substantially decline. The findings here suggest that information

asymmetry is at the root of debt maturity choice.