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Asset Life, Leverage, and Debt Maturity Matching

Author

Listed:
  • Thomas Geelen

    (Copenhagen Business School - Department of Finance; Danish Finance Institute)

  • Jakub Hajda

    (HEC Montreal - Department of Finance)

  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

  • Adam Winegar

    (BI Norwegian Business School)

Abstract

Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.

Suggested Citation

  • Thomas Geelen & Jakub Hajda & Erwan Morellec & Adam Winegar, 2024. "Asset Life, Leverage, and Debt Maturity Matching," Swiss Finance Institute Research Paper Series 24-06, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2406
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    More about this item

    Keywords

    capital age; asset life; maturity matching; debt cycles; maturity cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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