Debt maturity and the dynamics of leverage

  • This paper shows that long debt maturities eliminate equity holders’ incentives to reduce leverage when the firm performs poorly. By contrast, short debt maturities commit equity holders to such leverage reductions. However, shorter debt maturities also lead to higher transactions costs when maturing bonds must be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage when the firm is doing poorly motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt.

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Metadaten
Author:Thomas Dangl, Josef Zechner
URN:urn:nbn:de:hebis:30:3-418664
URL:https://ssrn.com/abstract=2858756
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 547
Series (Serial Number):CFS working paper series (547)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2016
Year of first Publication:2016
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2016/11/01
Tag:debt maturity; optimal capital structure choice
Issue:June 15, 2016
Page Number:52
Note:
A previous version of this paper was circulated under the title “Voluntary Debt Reductions”.
HeBIS-PPN:396717543
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht