Information cost and default risk valuation

In this paper, we analyze the valuation of defaultable corporate debt with incomplete information in a relative simple framework by introducing the concept of incomplete information's cost. The main results in this paper are that the impacts of incomplete information concerning firm's value and debt value on the default risk are different. While an increase in the noise of firm's value increases the value of debt and reduces the credit spread, the degree of incomplete information concerning debt directly reduce the value of debt and so increase the default spread premium.