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A Theory of Multi-Period Debt Structure

Author

Listed:
  • Martin Oehmke

    (London School of Economics)

  • Hongda Zhong

    (LSE)

  • Chong Huang

    (University of California, Irvine)

Abstract

We develop a model of multi-period debt structure. A simple trade-off between the termination threat required to make repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and repayment amounts. For mature firms with risky cash flows, frequent repayments maximize pledgeable income—for example, by rolling over short-term debt. In contrast, for firms with cash-flow growth or significant risk-free cash flows, adding risky repayments can decrease pledgeable income. In some cases, a single risky bullet repayment maximizes pledgeable income, effectively a long-term debt contract.

Suggested Citation

  • Martin Oehmke & Hongda Zhong & Chong Huang, 2017. "A Theory of Multi-Period Debt Structure," 2017 Meeting Papers 1645, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1645
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    References listed on IDEAS

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