Wu, Chunchi, "Information Asymmetry and the Sinking Fund Provision", Journal of Financial and Quantitative Analysis, Vol. 28, No. 3, (September 1993), pp. 399-416.
Abstract: This paper examines the signaling 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 signaling. Empirical evidence indicates that the sinking fun amortization rate signals the credit quality of the firm.