Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-30T21:03:52.076Z Has data issue: false hasContentIssue false
  • English
  • Français

Information Asymmetry and the Sinking Fund Provision

Published online by Cambridge University Press:  06 April 2009

Chunchi Wu
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the signalling implications of sinking funds and shows that under information asymmetry the sinking fund amortization rate provides a credible signal for the quality of the firm. In a separating equilibrium, better quality firms choose higher sinking fund amortization rates in their bond issues. A latent index model is proposed for testing the hypothesis of sinking fund signalling. Empirical evidence indicates that the sinking fund amortization rate signals the credit quality of the firm.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 3 , September 1993 , pp. 399 - 416
Copyright
Copyright © School of Business Administration, University of Washington 1993

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barnea, A.; Haugen, R. A.; and Senbet, L. W.. “A Rationale for Debt Maturing Structure and Call Provisions in the Agency Theoretic Framework.” Journal of Finance, 35 (12 1980), 1223–1234.CrossRefGoogle Scholar
Campbell, T. S., and Kracaw, W. A.. “Information Production, Market Signalling and the Theory of Financial Intermediation.” Journal of Finance, 35 (09 1980), 863–882.Google Scholar
Dunn, K. B., and Spatt, C. S.. “A Strategic Analysis of Sinking Fund Bonds.” Journal of Financial Economics, 13 (09 1984), 399–424.CrossRefGoogle Scholar
Dyl, E. A., and Joehnk, M. D.. “Sinking Funds and the Cost of Corporate Debt.” Journal of Finance, 34 (09 1979), 877–893.Google Scholar
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” American Economic Review, 74 (09 1984), 650–659.Google Scholar
Flannery, M. J. “Asymmetric Information and Risky Debt Maturity Choice.” Journal of Finance, 41 (03 1986), 19–37.Google Scholar
Harris, M., and Raviv, A.. “A Sequential Signalling Model of Convertible Debt Call Policy.” Journal of Finance, 40 (09 1985), 1263–1281.Google Scholar
Ho, T. S. Y., and Singer, R. F.. “Bond Indenture Provisions and the Risk of Corporate Debt.” Journal of Financial Economics, 10 (12 1982), 375–406.CrossRefGoogle Scholar
Ho, T. S. Y., and Singer, R. F.. “The Value of Corporate Debt with a Sinking-Fund Provision.” Journal of Business, 57 (07 1984), 315–336.Google Scholar
Jen, F. C., and Wert, J. E.. “Imputed Yields of a Sinking Fund Bond and the Term Structure of Interest Rates.” Journal of Finance, 21 (12 1966), 697–713.Google Scholar
John, K., and Williams, J.. “Dividends, Dilution, and Taxes: A Signalling Equilibrium.” Journal of Finance, 40 (09 1985), 1053–1069.Google Scholar
Judge, G. G.; Hill, R. C.; Griffiths, W. E.; and Lee, T. C.. The Theory and Practice of Econometrics. New York, NY: Wiley (1980).Google Scholar
Kao, C., and Wu, C.. “Two-Step Estimation of Linear Models with Ordinal Unobserved Variables: The Case of Corporate Bonds.” Journal of Business and Economics Statistics, 8 (07 1990), 317–325.Google Scholar
Kaplan, R., and Urwitz, G.. “Statistical Models of Bond Ratings: A Methodological Inquiry.” Journal of Business, 52 (04 1979), 231–261.Google Scholar
Leland, H., and Pyle, D.. “Information Asymmetries, Financial Structure, and Financial Intermediation.” Journal of Finance, 32 (05 1977), 371–387.CrossRefGoogle Scholar
Mitchell, K. “The Call, Sinking Fund, and Term-to-Maturity Features of Corporate Bonds: An Empirical Investigation.” Journal of Financial and Quantitative Analysis, 26 (06 1991), 201–222.CrossRefGoogle Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (12 1977), 147–175.CrossRefGoogle Scholar
Ogden, J. P. “A Rationale for the Sinking Fund Provision in a Quasicompetitive Corporate-Bond Market.” Journal of Business Research, 16 (02 1988), 197–208.CrossRefGoogle Scholar
Pinches, G. E., and Mingo, K. A.. “A Multivariate Analysis of Industrial Bond Ratings.” Journal of Finance, 28 (03 1973), 1–18.Google Scholar
Riley, J. “Information Equilibrium.” Econometrica, 47 (03 1979), 331–359.CrossRefGoogle Scholar
Smith, C. W. Jr and Warner, J. B.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (06 1979), 117–161.Google Scholar
Thatcher, J. S. “The Choice of Call Provision Terms: Evidence of the Existence of Agency Costs of Debt.” Journal of Finance, 40 (06 1985), 549–561.Google Scholar
Terza, J. V. “Estimating Linear Models with Ordinal Qualitative Regressors.” Journal of Econometrics, 34 (03 1987), 275–291.Google Scholar
Winship, C., and Mare, R.. “Regression Models with Ordinal Variables.” American Sociological Review, 49 (08 1984), 512–525.Google Scholar