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A Gap-Filling Theory of Corporate Debt Maturity Choice

  • Robin Greenwood
  • Samuel Hanson
  • Jeremy C. Stein

We argue that time-series variation in the maturity of aggregate corporate debt issues arises because firms behave as macro liquidity providers, absorbing the large supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with relatively more short-term debt, firms fill the resulting gap by issuing more long-term debt, and vice-versa. This type of liquidity provision is undertaken more aggressively: i) in periods when the ratio of government debt to total debt is higher; and ii) by firms with stronger balance sheets. Our theory provides a new perspective on the apparent ability of firms to exploit bond-market return predictability with their financing choices.

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File URL: http://www.nber.org/papers/w14087.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14087.

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Date of creation: Jun 2008
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Publication status: published as Robin Greenwood & Samuel Hanson & Jeremy C. Stein, 2010. "A Gap-Filling Theory of Corporate Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 65(3), pages 993-1028, 06.
Handle: RePEc:nbr:nberwo:14087
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