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Maturity rationing and collective short-termism

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  • Milbradt, Konstantin
  • Oehmke, Martin

Abstract

Financing terms and investment decisions are jointly determined. This interdependence, which links firms׳ asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter-maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Suggested Citation

  • Milbradt, Konstantin & Oehmke, Martin, 2015. "Maturity rationing and collective short-termism," LSE Research Online Documents on Economics 84513, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:84513
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    More about this item

    Keywords

    short-terminism; asset maturity; credit rationing; asymmetric information; cross-firm externality;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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