Corporate Debt Maturity and the Real Economy

How do firms manage debt maturity in the presence of investment opportunities? I document empirically at aggregate and firm levels that corporations lengthen their average maturity of debt when output and investment rates are larger and average credit spreads are lower. To explain these findings, I construct an economic model where firms dynamically choose investment, short-term debt, and long-term debt. In equilibrium, long-term debt is more costly than short-term debt and is only used when investment opportunities present themselves in peaks of the business cycle. This framework suggests that economic stability and lower credit risk are reflected in firms that are able to hold more leverage and a higher proportion of long-term debt.