Corporate Bond Pricing With Discretionary Disclosure
Date Issued
2006
Date
2006
Author(s)
Chu, Hsu-Wen
DOI
en-US
Abstract
In our structural credit model based on incomplete information, investors cannot observe a firm’s true asset value directly. Investors instead draw inference from the available accounting data. The incomplete information arises from a fixed time lag between the current value of assets and the asset value known to outsiders. In other words, when the true asset value is , the outsiders know only the value and that the asset value has not hit zero between time and time . Moreover, sometimes the manager chooses to withhold accounting data so that information asymmetry becomes worse. However, when the current value is substantially lower than lagged report and if we only consider time lag in the imperfect information model, the term structure of credit spreads is opposite to the one emerging from empirical reference.
On this account, we introduce discretionary disclosure into the imperfect information model by making disclosure decision become an endogenous choice on the part of the firm with different types of disclosure costs. Then we show that the lack of precise knowledge of a firm’s value process and the awareness of disclosure threshold can lead to different predictions on the shape of the term structure of credit spreads. Our structural model is more consistent with the empirical result that a higher transparency is rationally associated with lower credit spreads for most of the term structure. Especially when the form of disclosure cost is quadratic and increasing in information precision, it seems to solve most conflicts between the imperfect information credit model and the empirical statistics. Default intensity, the critical feature of reduced-form models, is derived from this structural approach in models where bond investors have incomplete information about asset values of firms with discretionary disclosure rights. Last, I use GM and AIG cases to reveal the importance of delaying accounting reports to the capital market.
Subjects
選擇性揭露
揭露成本
Discretionary disclosure
Disclosure cost
Proprietary information
SDGs
Type
thesis
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