Debt Maturity and Commitment on Firm Policies

No 2303, Working Papers from Federal Reserve Bank of Dallas

Abstract: If firms can issue debt only at discrete dates, debt maturity is an effective device against the commitment problem on debt and investment policies. With shorter maturities, debt dynamics are less persistent and more valuable because upward leverage adjustments are faster and long-run leverage lower. Debt maturities that are relatively shorter than asset maturities increase marginal q, and reduce underinvestment. A decomposition of the credit spread consistent with equilibrium shows that the component due to the commitment problem on future debt issuances is sizeable when leverage and default risk are low, and is lower for shorter maturity.

Keywords: credit risk; debt-equity agency conflicts; leverage ratchet effect; financial contracting; debt maturity (search for similar items in EconPapers)
JEL-codes: E22 G12 G31 G32 (search for similar items in EconPapers)
Pages: 63
Date: 2023-04-19
New Economics Papers: this item is included in nep-cfn and nep-des
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dallasfed.org/-/media/documents/research/papers/2023/wp2303.pdf Full text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:96046

Ordering information: This working paper can be ordered from

DOI: 10.24149/wp2303

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().