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Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads

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  • Hui Chen
  • Yu Xu
  • Jun Yang

Abstract

We build a dynamic capital structure model to study the link between firms' systematic risk exposures and their time-varying debt maturity choices, as well as its implications for the term structure of credit spreads. Compared to short-term debt, long-term debt helps reduce rollover risks, but its illiquidity raises the costs of financing. With both default risk and liquidity costs changing over the business cycle, our calibrated model implies that debt maturity is pro-cyclical, firms with high systematic risk favor longer debt maturity, and that these firms will have more stable maturity structures over the cycle. Moreover, pro-cyclical maturity variation can significantly amplify the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high beta, high leverage, or a lumpy maturity structure. We provide empirical evidence for the model predictions on both debt maturity and credit spreads.

Suggested Citation

  • Hui Chen & Yu Xu & Jun Yang, 2012. "Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads," NBER Working Papers 18367, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18367
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    1. repec:wsi:rpbfmp:v:20:y:2017:i:03:n:s0219091517500199 is not listed on IDEAS
    2. Bruche, Max & Segura, Anatoli, 2017. "Debt maturity and the liquidity of secondary debt markets," Journal of Financial Economics, Elsevier, vol. 124(3), pages 599-613.
    3. repec:eee:finana:v:54:y:2017:i:c:p:130-143 is not listed on IDEAS
    4. repec:kap:jbuset:v:144:y:2017:i:3:d:10.1007_s10551-015-2856-1 is not listed on IDEAS
    5. Konstantin Milbradt & Martin Oehmke, 2014. "Maturity Rationing and Collective Short-Termism," NBER Working Papers 19946, National Bureau of Economic Research, Inc.
    6. Ansgar Walther, 2014. "Jointly optimal regulation of bank capital and maturity structure," Economics Series Working Papers 725, University of Oxford, Department of Economics.
    7. Philipp König & David Pothier, 2014. "Asymmetric Information and Roll-over Risk," Discussion Papers of DIW Berlin 1364, DIW Berlin, German Institute for Economic Research.
    8. repec:gam:jijfss:v:6:y:2018:i:1:p:13-:d:128713 is not listed on IDEAS
    9. Zhiguo He & Konstantin Milbradt, 2016. "Dynamic Debt Maturity," NBER Working Papers 21919, National Bureau of Economic Research, Inc.
    10. Milbradt, Konstantin & Oehmke, Martin, 2015. "Maturity rationing and collective short-termism," LSE Research Online Documents on Economics 84513, London School of Economics and Political Science, LSE Library.
    11. el Alaoui, AbdelKader Ouatik & Bacha, Obiyathulla Ismath & Masih, Mansur & Asutay, Mehmet, 2016. "Shari’ah screening, market risk and contagion: A multi-country analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 93-112.
    12. Hui Chen & Rui Cui & Zhiguo He & Konstantin Milbradt, 2014. "Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle," NBER Working Papers 20638, National Bureau of Economic Research, Inc.
    13. Choi, Jaewon & Hackbarth, Dirk & Zechner, Josef, 2013. "Granularity of corporate debt," CFS Working Paper Series 2013/26, Center for Financial Studies (CFS).
    14. Julian Kozlowski, 2017. "Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets," 2017 Meeting Papers 699, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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