Managerial ability and debt maturity

• Published in: Journal of contemporary accounting & economics 2022-04, Vol.18 (1), p.100295, Article 100295
• Main Authors: Khoo, Joye, (Wai Kong) Cheung, Adrian
• Format: Article
• Language: English
• Subjects: Debt maturity; Managerial ability
• ISSN: 1815-5669
• DOI: 10.1016/j.jcae.2021.100295

•Firms with high ability managers tend to undertake more short-term debt financing.•The positive association is stronger for firms facing severe information asymmetry.•It is also stronger for financially unconstrained firms or high quality firms.•The findings support the signalling theory for debt maturity structure. We examine whether and how managerial ability affects corporate debt maturity decisions. The demand for shorter maturity debt is expected to be higher in firms operated by high-ability managers, who possess the superior skills needed to anticipate firms’ economic prospects and communicate their private information, thereby alleviating information asymmetry and bolstering their reputation. We document that firms with high ability managers are associated with more short-term debt financing. The effect becomes stronger for firms facing severe information asymmetry problems, unconstrained firms or high quality firms. Supportive evidence is found from the analysis of short- and long-term debt issuance activity. Our findings remain robust to alternative measures of managerial ability and debt maturity choice, and are not driven by omitted variable bias, endogeneity concerns or industry group. Overall, we provide robust evidence that supports the signalling theory for debt maturity structure and contributes to the literatures on managerial ability.