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Endogenous Debt Maturity: Liquidity Risk vs. Default Risk

Author

Listed:
  • Rodolfo Manuelli

    (Washington University)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

Abstract

We study the endogenous determination of debt maturity in a setting with default risk. Firms have access to a bond with a flexible structure. The optimal bond maturity balances liquidity risk and default risk. Firms with poor prospects and firms in more unstable industries will choose shorter maturities even if it is feasible to issue longer debt. The model also offers predictions on how asset maturity, asset salability, and leverage influence maturity. Even though our model is extremely stylized, predictions are roughly consistent with the evidence. Moreover, it o¤ers some insights into the factors that determine the structure of debt.

Suggested Citation

  • Rodolfo Manuelli & Juan Sanchez, 2019. "Endogenous Debt Maturity: Liquidity Risk vs. Default Risk," 2019 Meeting Papers 1103, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1103
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    References listed on IDEAS

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    Cited by:

    1. 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:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • 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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