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Dynamic Debt Maturity

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  • Zhiguo He
  • Konstantin Milbradt

Abstract

A firm chooses its debt maturity structure and default timing dynamically, both without commitment. Via the fraction of newly issued short-term bonds, equity holders control the maturity structure, which affects their endogenous default decision. A shortening equilibrium with accelerated default emerges when cash flows deteriorate over time so that debt recovery is higher if default occurs earlier. Self-enforcing shortening and lengthening equilibria may coexist, with the latter possibly Pareto dominating the former. The inability to commit to issuance policies can worsen the Leland problem of the inability to commit to a default policy–a self-fulfilling shortening spiral and adverse default policy may arise.Received April 16, 2015; accepted February 20, 2016 by Editor Itay Goldstein.

Suggested Citation

  • Zhiguo He & Konstantin Milbradt, 2016. "Dynamic Debt Maturity," The Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2677-2736.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:10:p:2677-2736.
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    JEL classification:

    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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