IDEAS home Printed from https://ideas.repec.org/p/red/sed017/699.html
   My bibliography  Save this paper

Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets

Author

Listed:
  • Julian Kozlowski

    (New York University)

Abstract

What are the linkages between maturity of corporate debt, liquidity of financial markets and the real economy? Firms in developing countries borrow at shorter maturities and those assets are traded in less liquid markets, relative to advance economies. To understand these facts, this paper studies how firms choose and finance investment projects in a production economy subject to an over-the-counter trading friction in financial markets and a time-to-build constraint on investment. Long-term assets rely on the possibility of being traded in secondary markets. Hence, the credit spread due to liquidity increases with the maturity of the asset, which generates an upward sloping yield curve. As a result, an improvement in market liquidity flattens the yield curve and benefits long-term borrowing. On the other hand, investment choices depend on financial costs. The time-to-build constraint implies that in order to produce a more profitable firm, an entrepreneur needs borrowing for a longer period of time. Hence, when borrowing costs at longer horizons decline, firms invest in more profitable longer-term projects. To evaluate the quantitative importance of this mechanism, I calibrate the model to match the US corporate debt market. Counterfactual exercises show that the liquidity of the secondary market can account for variations in maturity choices of 30.

Suggested Citation

  • 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.
  • Handle: RePEc:red:sed017:699
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2017/paper_699.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    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. World Bank, 2015. "Global Financial Development Report 2015/2016," World Bank Publications, The World Bank, number 22543, July.
    3. 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.
    4. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
    5. Eduardo Borensztein & Kevin Cowan & Barry Eichengreen & Ugo Panizza (ed.), 2008. "Bond Markets in Latin America: On the Verge of a Big Bang?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262026325, March.
    6. Juan Sanchez & Rodolfo Manuelli, 2016. "Endogenous Debt Maturity: Liquidity Risk vs. Default Risk," 2016 Meeting Papers 1435, Society for Economic Dynamics.
    7. Fabio Schiantarelli & Fidel Jaramillo, 2002. "Access to Long Term Debt and Effects on Firms' Performance: Lessons from Ecuador," Research Department Publications 3153, Inter-American Development Bank, Research Department.
    8. Amy K. Edwards & Lawrence E. Harris & Michael S. Piwowar, 2007. "Corporate Bond Market Transaction Costs and Transparency," Journal of Finance, American Finance Association, vol. 62(3), pages 1421-1451, June.
    9. Bethune, Zachary & Sultanum, Bruno & Trachter, Nicholas, 2016. "Private Information in Over-the-Counter Markets," Working Paper 16-16, Federal Reserve Bank of Richmond.
    10. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
    11. Fan, Joseph P. H. & Titman, Sheridan & Twite, Garry, 2012. "An International Comparison of Capital Structure and Debt Maturity Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(01), pages 23-56, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:699. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.