Signaling Hypothesis, Asymmetric Information and Debt Maturity in Indian Corporate Sector

The information asymmetry is a complex market phenomenon pervasive in different magnitude in financial markets all over the world. The information asymmetry causes informational differences between markets and managers, which results in moral hazard and adverse selection of securities in the corporate debt market. The signaling hypothesis establishes that the debt maturity choice of a firm is an appropriate signal of the insider's information about the firm's quality to asymmetrically informed market. Drawing a sample drawn from the BSE 500, this paper has adopted panel OLS regression methodology to investigate empirically the relation between signaling hypothesis and debt maturity. The statistically significant and negative coefficient on firm quality strongly supports the empirical research hypothesis that debt maturity inversely relates to firm quality and the debt maturity choice of a firm is a valid signal about the firm quality to the asymmetrically informed market. Under the constraints of the market imperfections, Indian companies have adopted maturity matching, long-term debt with call and sinking fund provisions, bank debt, and secured debt, and debt with covenants to deal with the agency problems, information asymmetry and liquidity risk.