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Dynamic Debt Maturity

Author

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  • Zhiguo He
  • Konstantin Milbradt

Abstract

A firm chooses its debt maturity structure and default timing dynamically, both without commitment. Via the fraction of newly issued short-term bonds, equity holders control the maturity structure, which affects their endogenous default decision. A shortening equilibrium with accelerated default emerges when cash-flows deteriorate over time so that debt recovery is higher if default occurs earlier. Self-enforcing shortening and lengthening equilibria may co-exist, with the latter possibly Pareto-dominating the former. The inability to commit to issuance policies can worsen the Leland-problem of the inability to commit to a default policy—a self-fulfilling shortening spiral and adverse default policy may arise.

Suggested Citation

  • Zhiguo He & Konstantin Milbradt, 2016. "Dynamic Debt Maturity," NBER Working Papers 21919, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21919
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Peter DeMarzo & Zhiguo He, 2016. "Leverage Dynamics without Commitment," NBER Working Papers 22799, National Bureau of Economic Research, Inc.
    3. Martin Oehmke & Hongda Zhong & Chong Huang, 2017. "A Theory of Multi-Period Debt Structure," 2017 Meeting Papers 1645, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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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