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Debt Maturity and the Liquidity of Secondary Debt Markets

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Abstract

We develop an equilibrium model of debt maturity choice of firms, in the presence of fixed issuance costs in primary debt markets, and an illiquid over-the-counter secondary debt market with search frictions. Liquidity in this market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of debt holders who sell in the secondary market and hence reduce the interest rate that firms need to offer on debt. Long maturities reduce re-issuance costs. The optimally chosen maturity trades off both considerations. Firms individually do not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms. As a result, the laissez-faire equilibrium exhibits inefficiently short maturity choices.

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  • Max Bruche & Anatoli Segura, 2013. "Debt Maturity and the Liquidity of Secondary Debt Markets," Working Papers wp2013_1303, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2013_1303
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    6. Anatoli Segura & Javier Suarez, 2017. "How Excessive Is Banks’ Maturity Transformation?," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3538-3580.
    7. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure," JRFM, MDPI, vol. 11(2), pages 1-16, May.
    8. Cortina Lorente,Juan Jose & Didier Brandao,Tatiana & Schmukler,Sergio L. & Cortina Lorente,Juan Jose & Didier Brandao,Tatiana & Schmukler,Sergio L., 2016. "Corporate borrowing and debt maturity : the effects of market access and crises," Policy Research Working Paper Series 7815, The World Bank.
    9. Anatoli Segura & Javier Suarez, 2017. "How Excessive Is Banks’ Maturity Transformation?," Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3538-3580.
    10. Hasan, Mostafa Monzur & Asad, Suzona & Wong, Jin Boon, 2022. "Oil price uncertainty and corporate debt maturity structure," Finance Research Letters, Elsevier, vol. 46(PA).
    11. Wei, Xu & Xiao, Xiao & Zhou, Yi & Zhou, Yimin, 2023. "Spillover effects between liquidity risks through endogenous debt maturity," Journal of Financial Markets, Elsevier, vol. 64(C).
    12. Paseda, Oluseun & Olowe, Rufus, 2018. "The Debt Maturity Structure of Nigerian Quoted Firms," MPRA Paper 117061, University Library of Munich, Germany, revised 30 Jun 2018.
    13. Zhou, Yimin & Wei, Xu, 2023. "Bond liquidity, debt maturity and bond risk premium," Finance Research Letters, Elsevier, vol. 54(C).
    14. Donaldson, Jason & Piacentino, Giorgia, 2019. "Money Runs," CEPR Discussion Papers 13955, C.E.P.R. Discussion Papers.
    15. Arseneau, David M. & Rappoport W., David E. & Vardoulakis, Alexandros P., 2020. "Private and public liquidity provision in over-the-counter markets," Theoretical Economics, Econometric Society, vol. 15(4), November.
    16. Chen, Rongda & Zhou, Hanxian & Jin, Chenglu & Liu, Jia, 2020. "Discount or premium? Pricing of structured products: An analysis of Chinese market," International Review of Financial Analysis, Elsevier, vol. 70(C).
    17. Donaldson, Jason Roderick & Piacentino, Giorgia, 2022. "Money runs," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 35-57.
    18. Gong, Yaxian & Wei, Xu, 2019. "Asset quality, debt maturity, and market liquidity," Finance Research Letters, Elsevier, vol. 31(C).
    19. 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.
    20. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.
    21. Gong, Yaxian & Wei, Xu, 2022. "Asset quality, financing structure, and bank regulations," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1061-1075.
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    23. Dunbar, Craig G. & King, Michael R., 2023. "Syndicate structure and IPO outcomes: The impact of underwriter roles and syndicate concentration," Journal of Corporate Finance, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Debt maturity; search; liquidity.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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