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Information Asymmetry and the Sinking Fund Provision

Published online by Cambridge University Press:  06 April 2009

Chunchi Wu
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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

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