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Debt Maturity and Commitment on Firm Policies

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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.

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  • Andrea Gamba & Alessio Saretto, 2023. "Debt Maturity and Commitment on Firm Policies," Working Papers 2303, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:96046
    DOI: 10.24149/wp2303
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    More about this item

    Keywords

    credit risk; debt-equity agency conflicts; leverage ratchet effect; financial contracting; debt maturity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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