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A Theory of Multiperiod Debt Structure

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  • Chong Huang
  • Martin Oehmke
  • Hongda Zhong

Abstract

We develop a theory of multiperiod debt structure. A simple trade-off between the termination threat required to make debt repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and amounts. As firms increase their borrowing, they add periodic risky repayments from the back of the maturity structure, with the time between repayments increasing in cash-flow risk. Cash-flow growth or a significant risk-free cash-flow component limits the number of risky repayments. Firms with a significant risk-free cash-flow component choose dispersed maturity profiles with smaller, relatively safe repayments every period, rather than riskier periodic repayments. Received May 31, 2017; editorial decision October 8, 2018 by Editor Stijn Van Nieuwerburgh.

Suggested Citation

  • Chong Huang & Martin Oehmke & Hongda Zhong, 2019. "A Theory of Multiperiod Debt Structure," The Review of Financial Studies, Society for Financial Studies, vol. 32(11), pages 4447-4500.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:11:p:4447-4500.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz026
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    Cited by:

    1. Vuillemey, Guillaume & Derrien, Francois & Mésonnier, Jean-Stéphane, 2020. "Set-up Costs and the Financing of Young Firms," CEPR Discussion Papers 14512, C.E.P.R. Discussion Papers.
    2. Hongda Zhong, 2021. "A Dynamic Model of Optimal Creditor Dispersion," Journal of Finance, American Finance Association, vol. 76(1), pages 267-316, February.
    3. Maretno A. Harjoto & Andreas G. F. Hoepner & Marcus A. Nilsson, 2022. "Bondholders’ returns and stakeholders’ interests," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1271-1301, November.
    4. Zhong, Hongda, 2021. "A dynamic model of optimal creditor dispersion," LSE Research Online Documents on Economics 106646, London School of Economics and Political Science, LSE Library.
    5. Benzoni, Luca & Garlappi, Lorenzo & Goldstein, Robert S. & Ying, Chao, 2022. "Debt dynamics with fixed issuance costs," Journal of Financial Economics, Elsevier, vol. 146(2), pages 385-402.
    6. Chiu, Wan-Chien & King, Tao-Hsien Dolly & Wang, Chih-Wei, 2021. "Debt maturity dispersion and the cost of bank loans," Journal of Corporate Finance, Elsevier, vol. 70(C).

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